Abb Ltd (ABB) 2013 Q2 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2013 results conference call. I am Stephanie, 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.

Good afternoon. Both Eric and Joe here. Thanks for joining us on our call for the 2013 second quarter results. As always my comments in this call refer to the presentation on our website at abb.com.

On chart 2 is our Safe Harbor text covering any forward-looking statements that we make at ABB. I know you're familiar with that. So we'll move to chart 3, which is titled Improved results on a balanced portfolio.

We continue to see positive impact on all results from a balanced and geographic business portfolio. We grew orders in a number of key sectors and geographies, including China. And we saw an encouraging trend with sequential order growth in almost all of our product businesses compared to the first quarter of the year.

At the same time, we executed from our strong order backlog to drive both revenues and higher earnings. And we continue to take out costs to maintain profitability, despite an uncertain market.

Orders were down as the strategic realignment in Power Systems launched at the end of last year started to take shape, with our focus on greater project selectivity and higher profitability. But we are pleased to see the first positive result in terms of higher gross margins in the division's order backlog.

There have been delays in the award of large orders, which is linked to the ongoing global macroeconomic uncertainty, and that impacted the orders this quarter. But our underlying demand drivers remain sound and we still generated a solid book-to-bill ratio for the first half of the year, up 0.99, and 1.06, excluding the Power Systems division. I'll come back to that point later.

In addition, we saw a good contribution from Thomas & Betts, and the synergies are on track. Both power divisions achieved a solid operational EBITDA margin, and we grew service revenues faster than total organic revenues. And our improving Net Promoter Score shows that we are making progress to increase customer satisfaction.

The Power-One acquisition has received all required approvals and we expect to announce the closing very shortly.

Finally we saw a good increase in earnings per share, partly due to some non-cash items. And most of the divisions turned in a solid cash performance that was basically offset by the cash developments in Power Systems. Eric will provide more details on that piece in a few moments.

Moving to chart 4, I've highlighted the main developments. I'll also point out too that orders are down, mainly due to the PS reset, which has been exacerbated by the continuing delays in the award of larger projects. We said, at the end of last year, that the repositioning of the Power Systems division would have an impact on orders received in 2013. And weak utility and industrial CapEx is also nothing new. So you're seeing that in our Q2 numbers.

The order backlog remains near record levels. A single large order in PS would be enough to move that up to a new record. And we see a positive, underlying business environment. So this is really a matter of timing more than anything.

Higher revenues show how our backlog supports growth through turbulent times. The operational EBITDA margin is more or less flat, and Eric will take you through the bridge in a moment to see how that comes together. But we're pleased that especially both power divisions produced strong profitability in a challenging marketplace.

Let's look at the geographic picture on chart 5. We felt the timing of large projects across the board, but we also saw a number of positives in the quarter. In Europe, Germany, Sweden and France, were all higher for us, with helped to offset most of the continued demand weakness in Southern Europe. In the US, Thomas & Betts obviously gives us a big plus as we start to capture the large opportunities in North America low-voltage space.

On an organic basis, the US was lower as we had fewer large orders in the power and oil and gas segments compared to the second quarter last year.

The Middle East and Africa is a similar story. Large orders were down here as well, although we did have some good growth in some of our larger markets in the region, such as Egypt and Saudi Arabia.

Finally Asia was lower despite another quarter of growth in China. India remains a tough environment for everyone. And we had some large marine orders in Korea last year that just didn't repeat.

Moving to chart 6, some order highlights you saw in the quarter. Although customers are taking a more cautious overall approach to CapEx, they do continue to invest in improved productivity and efficiency, and utilities are spending on a selective basis to increase how much power they can send through existing grids, and to improve overall grid reliability. You can find the details of these orders on our website.

Moving on to chart 7, highlights an interesting project we're working on together with Fastned to roll out a network of fast-charging stations for electric vehicles in the Netherlands. These are DC chargers, direct-current chargers, able to charge a car in 15 minutes to 30 minutes. In addition to delivering the chargers and some of the IT needed to help utilities handle billing, for example, we're also providing a service program to ensure optimal uptime and the reliability of the system.

Let's move to chart 8 and an overview of the divisional growth performance. I've already talked about orders for most divisions. When it comes to revenues you can again see how our longer backlog businesses, like Power divisions, or Process Automation, can generate growth, even in turbulent times. Low Voltage Products is reaping the benefits of the Thomas & Betts acquisition, but even on an organic like-for-like basis, orders are steady versus a year ago, but are trending higher sequentially, which is encouraging, since this is our shortest cycle business.

Revenues in DM are flat in the quarter, which basically reflects a relatively low orders growth in that business in the past few quarters, which in turn is a result of lower industrial production during that period.

PA orders were also down, but again, this is largely the result of the timing of large orders. We had several project awards last year in marine, in oil and gas and mining, which didn't repeat. Industrial CapEx is obviously a driver in the business and we too will feel the effects from time to time.

Nevertheless, we think we're in the right markets when it comes to automation in upstream oil and gas, and marine applications related to oil and gas, and to mining OpEx.

On the earnings side in chapter 9, the highlights are the two Power divisions in LP. Power Products, again, received -- achieved solid operational EBITDA margins as they continue to drive out cost and work their way through a less favorable backlog from a pricing point of view.

Power Systems improved project execution to lift their margin by almost 2 percentage points in the quarter. I should point out that this is not yet a reflection of the repositioning efforts aimed at a margin enhancement; that will come next year and beyond as we execute the better margin orders we are taking today that are buried in our backlog.

Low Voltage Products also increased margins in the quarter as they executed well across a number of areas such as cost savings, targeted growth initiatives and improved sales services.

DM's margin is down versus the same quarter a year ago, mainly because of a mix of revenues flowing through the P&L. For example, our recent successes in the automotive sector in our robotics solution is dilutive to the division's margin.

At the same time, the Baldor business is on track, continuing to develop positively, even though the United States' market for motors is soft at the moment.

Finally, PA margins are also lower. We're feeling the impact of some under-absorption in businesses like turbochargers and measurement products, a reflection of weaker demand in those markets. We have discussed in previous quarters some measures to address that.

PA's quarterly margins are also related to the timing of revenues from different projects, which have different profitability, so to some extent, this is a mixed issue. So, we would expect this to be a more normalized range on a 12-month basis.

I'll now turn you over to Eric to walk you through the EBITDA bridge on chart 10.

Thanks, Joe. So short term, we have the EBITDA bridge. You can see on the -- starting on the left side that the net savings are again positive. We still have remaining price pressure, but more modest, and still mainly related to the Power divisions.

In PP specifically, the price pressure in the quarter on orders was about 2%, whereas we still have 4% to 5% on revenues, which is reflected in the number above, which is also the same level as Q1. Over the coming quarters, you will then see a reduction down towards the 2% when their orders turn into revenues.

We also have a positive volume effect, helped this quarter by reduction in selling and R&D spend compared to a year ago. We are, since about a year ago, much more careful with both selling expense and R&D expense.

The mix was negative, as we had larger shadow systems revenues flowing through the P&L compared to the second quarter last year.

Then in the others, it is a mix of project costs and gains, some foreign exchange impacts, other provisions and costs, for instance, for legal costs, some inventory adjustments, smaller write-downs, which is part of all the running business.

And then, finally, to the right, you will see the contribution from Thomas & Betts, which is for the six weeks -- sorry, the difference between the six weeks last year and the full quarter that they have here in 2013, bringing us to a total margin of 15.2%.

Turning to the next chart, on the EPS, this is showing what we have done in earlier quarters; the details of these items that we have between the operational earnings and the net income. And you can see in the chart here that net income and earnings per share were up 16% on the basic basis in the quarter, and 2% if you look at the more operational measure on operational net income in the same way as we have done in earlier quarters.

We have also added a year-to-date view as those items between the two lines even itself out normally between the quarters; and you can see here that we have grown the basic net income and EPS by 6% and the operational EPS by some 8%.

Turning to the next chart, where we have the Thomas & Betts, you can see that we are still on track in a good way with Thomas & Betts. We had some modest growth in revenues versus a year ago; we calculated them on the full-quarter basis.

We see some positive signals in the US construction sector, which is certainly supportive for T&B, and we remain confident that the growth trajectory will continue for the rest of this year and keep us on plan.

Integration is well on track and will remain a key management focus over the next coming quarters.

On chart 13, you see the cash and balance sheet situation. Most of the divisions turned in a very solid cash generation in the quarter, which was largely offset by low cash in the Power Systems -- cash generation in the Power Systems division.

This was mainly related to the cash impact from the repositioning that we started in the fourth quarter of last year, and which we have commented on earlier. And they will come more through the rest of the year of 2013.

In addition, the timing of large project-related payments is always a factor in the project business in PS and can vary significantly from one quarter to the other.

On the balance sheet side, we have now a net debt of $3.4 billion at the end of the quarter, after paying the dividends, and we will also shortly then pay another billion for the Power-One deal. And net of the cash in Power-One, it will add some $750 million to the net cash of the Group.

We also recently got our A rating confirmed by Moody's in the yearly review, so we are in reasonable shape when it comes to the balance sheet and the rating.

Then, I turn it back to Joe again.

Thanks, Eric. Moving to chart 14, this is a chart where we try to give you an idea, not necessarily quarter to quarter, but as you look out in a year or so what we see from the underlying performance or opportunities we see by regions around the world.

We've updated it this quarter to reflect how we're feeling. Basically, there's not much difference to what we really presented in the first quarter. There's uncertainty out there, macro trends are highly unpredictable and all the disclaimers that we always make; but I think in this case, each one of these regions, as you all know on the phone, has its own dynamics from an economic standpoint right now.

The short term is very tough to call. We see some positive sequential trends in many of our product businesses, which gives us reasons for cautious optimism. And that's -- basically what we're saying is when you look at our short cycle, the shortest cycle businesses we have, we've really seen some positive trends here over the last quarter that we haven't seen in the last few.

On the other hand and certainly around the timing of large orders is likely to persist, as we saw here in the second quarter. We see that there are some large projects in the United States that are now likely to be pushed out to next year.

Brazil has been weaker than expected and that shouldn't be a surprise, given the economic difficulties that that country has been seeing right now.

At the same time, the construction business in the United States has provided us with some opportunities to grow in low voltage and in power distribution.

In Europe also, no change. We continue to benefit from our balanced local presence so that we can offset weaknesses in some countries with strength in others. Germany continues to look relatively stable, which is helping us ride through the weakness in Southern Europe.

The Middle East is a large project business. You know that over the years, you live and die by quarter on these large orders. We'll have to wait and see how that develops.

And in Asia, we see positive signs out of China while India remains a challenge. So in aggregate, I'd say things were moving sideways but I wouldn't expect demand to go down from here.

Moving to chart 15, just a summary of what we're talking about. Our outlook for the rest of the year remains unchanged for the end of the -- from the end of the first quarter. Macro indicators are increasingly mixed, which makes predicting the timing of orders more difficult, especially large project orders.

However, our strong backlog will continue to partly mitigate that uncertainty, while we continue to focus on balancing cost and growth and increasing customer satisfaction. We remain confident that our business and regional balance will continue to provide us with profitable growth opportunities going forward.

And so with that, I'd like to -- Ulrich Spiesshofer's on the phone and he can join us. And I'd just like to say, look, I am thrilled that Uli has been selected by the Board unanimously to backfill me as I've announced my exit. Uli and I have been good team mates for the last five years. We share a love and passion for this business and a confidence in its future and I love the continuity that Uli can provide as he comes into the role and so, with that, Uli, I'll turn it over to you for a few comments.

Thank you very much, Joe. So thank you for your kind words. I think, Joe, you'll leave our house with very positive momentum in many dimensions and especially a wonderful team that I've been privileged now to be part of for eight years.

So to the audience of this call, Joe and I are working very well on a smooth transition and I'm really pleased to share with you that the full team is supporting the transition in an absolutely wonderful way. I personally look forward to connecting even closer to all of you, especially the ones that I've not yet met personally.

So with that said, I hand over to Joe and Eric again.

Thanks, Uli. Uli's also agreed to answer any tough order questions that might come up here too, so we'll pass them over to him. That's a joke, Uli's signing off. Look, we'll -- Eric and I would be happy to answer any questions that you now might have.

(Operator Instructions) Jeff Sprague, Vertical Research Partners.

I guess two questions. First, just on backlog, can you give us a sense of how much of your backlog is deliverable in H2?

In the second half of this year, Jeff?

Yes. How much of your current backlog is deliverable in the second half of this year?

Eric, what do you think? It's out of my price range, Jeff. We're going to move to Eric.

No, I take care of that one. Obviously, we have a backlog in excess of $28 billion, which is two-thirds of the yearly volume for ABB so you can take for granted that for the second half of the year, significant progress in the backlog. Obviously, in addition to that, we have the short-cycle business which will provide us with more orders to add for the rest of the year, but we will not quote a specific percentage.

But is there any difference from where we'd typically be at this time in the year and --?

No, it is very similar to what's a typical year.

Jeff, what are you worried about? Just the revenues in second half, is that the basis of your question?

Yes, no, I'm just trying to get a sense. Obviously some of your backlog could stretch out very far and so I'm just -- you're expressing confidence in your year around backlog and just lumpiness in the orders. I'm just trying to get a sense, really your line of sight on the top line.

No, we feel confident on revenues in the sense of where we are.

No, no, we feel confident for the second half-year and many of the businesses have lead times in a way that the revenue projections now for the next six months is fairly clear.

And then just one more and I'll move on. Just on US grid pushouts. I think the sentiment at EPG was maybe that stuff is holding and it's not necessarily slipping. It sounds like things have changed. Obviously, I'm quite aware of the pressures in the US power market but is there something in particular that you've seen happen with regulated returns or any other dynamics that are really getting at the delays or pushouts?

No, Jeff, I wouldn't say there's any underlying systematic changes from a regulatory standpoint or thought process. We're tracking a few large jobs in the United States and it looks like they could just slip from a fourth quarter kind of a play to next year sometime. And so it's just, to me it's the urgency of these things, Jeff, it's a not a regulatory piece. And we're talking about quarters here, not years.

Right. All right, thanks a lot and good luck, Joe. We'll talk to you.

Yes, thanks. Thanks, Jeff.

Thank you.

Olivier Esnou, Exane BNP Paribas.

Three questions please. First, on the Process business, you talk about pressure in marine, mining, oil and gas. I think marine and mining I wasn't so surprised. I was a bit more surprised by oil and gas. I'd like to know if you could just maybe give some relative quantification of the kind of decline you're seeing in those three markets at the moment.

The second question is on the bridge where there was a reversal of R&D and SG&A. And I just wanted to know is it something which you already had in the budget at the end of last year or is it your reaction to the current slowdown and what sort of flexibility do you have around those numbers for the year -- for this year, sorry.

And the third question is on Power Systems' performance, which surprised me again this quarter. I think the message has been generally that Q1 would be weak and there would be a gradual recovery towards the 9%. Then Q1 was strong and the message was yes, but it's going to go down again. So what's driving this surprising performance? Is the visibility into this business actually quite difficult quarter over quarter? Thank you.

Olivier, first of all on the process piece on Process Automation, remember this is a mid-cycle to long-cycle kind of business. I think it's good to keep in mind too that 50% of the revenues of that business are related to services. And so they're pretty consistent in the sense of quarter-to-quarter predictability. And then we have this huge volatility that flows through in larger project orders, often between $50 million and $150 million, the range we work with there.

We have really -- when we talk about marine being strong last year, almost all that marine is associated with oil and gas and so we really struggle sometimes in expressing that as marine, rather than oil and gas. And many of that went through ships that would be going offshore to drill for oil and gas and some of that was captured in Korean shipyards. When we talk about Asia being down quarter to quarter, a big part of that Asia piece is Korea and not being able to repeat those orders.

From a mining standpoint, it shouldn't be -- for me, it shouldn't be a mystery that we see some pressure from mining. But mainly we talk about it's really the excavation side of mining, what we might call Greenfield or bigger expansions in mining.

When you look at ore processing and things that have to do with productivity or just the efficiency that you want to drive an ore body inside of a mine, we still feel pretty good about our tender backlog in that area, things like gearless mill drives and mine hoists and those kind of things that appeal to that part of the mining industry. So this is -- again, the mining is down but again we see it and I think we understand it.

On the oil and gas piece, I would really say that has nothing to do with the industry itself. The CapEx is pretty consistent in that industry. That is strictly what we see in large orders, often upstream that occur in quarter to quarter.

On the bridge walk on R&D, I'll let Eric answer that question.

Yes. So on the sales and R&D side, it is down on a strict quarter-to-quarter comparison, mainly due to timing of some costs on the R&D side. Overall, we are not reducing R&D costs in a cost-saving effort. We are rather keeping R&D costs stable from 2012 into '13 on an overall basis.

On the sales cost, we are not expanding as fast as we had planned in the budget. So there we have more leeway what we can do. So this, we are somewhat below the budget on that side, Olivier, but not much.

And for the full year, then, should we expect still a net investment or you think you can have a zero positive contribution?

I think on the R&D side, we are, as I said, aiming to keep somewhere around last year's number and on the sales side, sales cost is not only expense, it is also related to volume to some extent. So I think you should expect the sales percent of revenues you have seen so far to continue during the year.

Okay.

We like to keep those percentages to orders and sales in line. If you look at R&D too, we had some Power Products and things that would be what we'd call commissioning expenses for new technology last year. That can be -- that's why Eric talks about quarter to quarter, we want to keep them flat. It's not that we're reducing the amount of R&D that we're spending, it's just the kind of R&D that we do within the business.

And on the PS performance. They performed well this quarter. They're close to 8%. It's 7.9%, operational -- our EBITDA number. This is quarter-to-quarter project execution and this team has done really well in the first and second quarter. I know that a lot in the team, as I talk to you guys out there, are cautious about this at times and we need to be as we flow through these projects because there's a lot of variability. Some of these projects are going up, some are going down. And we often don't give great clarity on this until the last month of the quarter on how it's going to wash out.

But what I'm really pleased with though is we talked about the increase in margin in our order backlog for PS. Now orders were down 31%. No one likes to see that but we did predict that the orders would be down but we're seeing a significant margin increase in our backlog which is good and that for certain will start to bleed in next year.

And that will help to underline these margins and not have to live on the kind of month-to-month and quarter-to-quarter variability that we had in the past of just living hand-to-mouth on EPC and systems orders and that's one of the key reasons we did this.

Okay, thank you very much. Thank you.

Ben Uglow, Morgan Stanley.

I had a couple. First one, I just wanted to make sure I completely understood the response to the last question. On the oil and gas side, what it seems to me that you're saying, Joe, is that you're not seeing, or the year-over-year comps are difficult. You may not have seen so many large orders but there's not a fundamental change in your customer behavior. Or did I misinterpret that? Have your oil and gas customers changed their CapEx intentions to any significant degree? So that was question number 1.

Question number 2 is really just color on China. The orders were indeed positive; could you tell us how Power and Automation in China roughly split out? And I'm very curious to know what your general impression is on the industrial environment in China at the moment, Joe.

Okay. Ben, on your first question, oil and gas, I'll make it very clear. I don't see a customer change in CapEx in oil and gas. What we see is the oil and gas that we express through marine, we haven't seen as many offshore ships actually being contracted this year that we did last year. So that's a change but I don't think that means that the CapEx is going down; they just move their CapEx into different areas because that's the way the shipbuilding piece goes.

Does that make sense to you Ben?

So in the classic oil and gas business, and what we talk about upstream, offshore platforms, we play in a lot and those types of things, I'm telling you we're not seeing any what I would say systemic change in that business. But year to year, these huge marine orders that are associated with oil and gas we've seen this kind of fluctuation and that more than anything as well I've seen in numbers.

On a -- Ben, I want to be sure you're clear on that. Is that clear enough?

Yes. What I guess I was curious about was just whether, let's call it upstream oil and gas CapEx, onshore, whether big customers, particularly in the States, were deferring or changing their intentions in any way.

Haven't seen that. I can't say it won't happen, but I haven't seen that yet.

Okay.

On the China side, when you look at China for the first quarter is -- wait a minute, for the second quarter, we can give you the first half too, which is about [11] (inaudible) overall. For the second quarter, Power's about flat overall in China and Automation was about [3]. So the 2 percentage points that we talked about for the quarter, predominantly the growth side was on the Automation piece.

On the Power side, Ben, to give you some color, some of the upside we've seen has been in transportation. Things like transformers that are used on electric trains, medium voltage switchgear, that's used on the stationery part of electric trains, was positive. If you go back then maybe a year and a half ago, we're talking about how those orders dried up because of the uncertainty around the Transportation Secretary, the leadership that was going on in China, whatever. We see that gradually improving.

We also had some nuclear orders that are moving through also, from a Power standpoint, that was a positive from a year-to-year standpoint also, the Power piece.

So we think that China will continue to be in a growth phase for us. We're not predicting double digits here in a short period of time, but it is relatively robust in the sense of the breadth of what we're seeing in China right now for the first half, from a growth viewpoint.

On the Automation side, if you throw in low voltage, low voltage is up pretty well within China too. Some of that has to do with the construction market in China, particularly as it moves west and some of it has to do the industrial side.

Very clear. Thank you very much.

Okay, you're welcome.

Andreas Willi, JPMorgan.

My questions are on the Power business. Obviously you have been more selective, some of your competitors have also said they will be more selective, so it's more difficult for us now to track the market, because orders are also down recently at Alstom, they are falling at Siemens. What do you see overall in terms of the market growth in that business and who is taking the orders that you and maybe some of the other western competitors don't want to take any more, because they are too price competitive?

And the second question, on pricing in Power. What we see there now in new orders coming in. If one looks at the PPI index in the US, and I don't know to what degree that's really reliable data, that shows that transmission and transformer pricing has started to weaken a bit recently. Is that index a fair reflection or not?

Andreas, on the Power business, on the order side, it's so early in the game to figure out exactly who's losing share or who is giving up share. But if you take our Power Systems division, there's two business units that are buried in there that are the primary drivers of the lower order intake for the quarter. And they are our grid systems business that does things like, cables, and high voltage DC and those kinds of businesses.

And it's our substation automation business. [They don't do] substations. Remember a big part of the substation market continues to be in the Middle East. I could tell you specifically in substations, when we did a Power Systems reset, I wanted to be sure we weren't competing against Korean EPCs or just basic EPCs before. We're used to competing against Siemens in those kinds of applications, competing against Alstom, but I never felt that I want to be in competition with Korean EPCs.

I can tell you specifically that we have lost some of the business in Power Systems in the Middle East to Korean EPCs. But I also can tell you that Power Products has actually grown in product sales to Korean EPCs as we've done that. So I feel comfortable that that's the right decision for us, in the sense that we have mitigated risk that we've experienced in those projects before, and in the higher profitability side of our business, on the product side, is we're helping to pick some of that up through the Korean EPCs.

On the larger grid side, Andreas, this -- remember this plays out in broad time. These are big orders, often $300 million to $1 billion orders. They don't come around every quarter. So I think we're going to have to wait to see how that really works out between, really, Siemens, Alstom and ABB as we quote those kind of orders going forward.

And that's still not clear. And we talk about pushouts. That where we see most of the pushout in the Power Systems business has been around the grid systems business.

And on pricing?

I'll let Eric take that.

So the pricing on the orders in Power Products is about 2%. So it's the same level as first quarter 2013, so you can say we are down on the lower level of deterioration. Much lower than before but it is stable from the first quarter. It could be that partly is what you also reflect when you talk about the index there, even though yours is of course not the whole world, we have the whole world in our calculations.

As I mentioned already in my presentation on revenues, we still see a 4% to 5% price deterioration, so as we work through the backlog now over the coming quarters, that 4% to 5% will come down towards to the 2%.

And should we then just assume margins go up by 2 to 3 on the basis points, or are there any other drivers we should consider?

There's a lot of other drivers, including the mix on the geographical side and obviously how much cost saving we can achieve. But the assumption that price coming down should help us on the margin side is clear.

Thank you very much.

Daniela Costa, Goldman Sachs.

One question, well two questions related to your comment on what's happening on large orders, really it was the lack of large orders and the fact that you don't expect them to come back so soon. So two things. One, will you see -- if this goes on for a prolonged period, what are the implications for capacity? So do you think there is a chance you have to really look at that?

And the second one is, how should we see this in the context of your target system? I remember in some prior periods you used to have these yellow, green, red lights. Could you maybe update us a little bit on what are the implications of these for those targets? Thank you.

On the large orders, I want to tell you, when I say they're not coming back any time soon, I hope I didn't say that. I hope what you're hearing is I don't know, and no one knows. We see those large orders out there. They're in our tender backlog, they move around a lot. But I'm not making a prediction that they're moving out for any uncertain period of time. I won't be here, but I don't want someone to come back in the third quarter and we surprise you with some large orders. And we just don't know. There's volatility there.

On your capacity question. When you look at ABB, particularly when we talk about large orders around Power Systems and Power Products, a lot of our capacity is assembled capacity. It's -- these are not -- there's a lot of temporary labor associated with this, in the way we've put it together. We have a good backlog in those businesses, we can project what's going on.

So we have an ability to be able to adjust from a labor content standpoint and material standpoint, with the visibility we have through the backlog which makes those businesses a little bit easier to deal with, from a capacity standpoint than the shorter-cycle stuff like we have in low voltage products.

There are two businesses that I would say are loading based, and they're buried within the Power Systems business; it's our cable business, which has a lot of installed capacity and obviously amortization cost; also our high-powered electronics plant for thyristors and IGBTs and those kind of things, here in Switzerland.

Plant loading are important for those, but right now, as we look at plant loadings for those things, we're comfortable for those; as you go out a year, 18 months, we're really in good shape on those assets.

On the other piece, I'll let Erik talk to you about red, yellow and green.

So the long-term outlook on revenue growth where the target is 7% to 11% for Power Systems, the revised target we issued in December last year. We are well within the range. If you look at the accumulated number including the performance so far this year, we showed a green light on that target in this recent presentation and whether the light is green or turning to little bit yellow, it's hard to say. It will depend on, as Joe said, when those large orders will be awarded and how they will play into '14 and '15; but we feel confident about the target as such.

Does that answer your question?

Yes. I was wondering on the other divisions as well beyond Power Systems.

All of the divisions, I thought you were focusing on Power Systems. I think not too much has changed fundamentally on the other divisions from what we showed you earlier this year in terms of these targets. We said all along that reaching those targets will include that we have a reasonable growth in '14 and '15. That is what is still seen, obviously depending a bit on all those project awards I have discussed earlier on the call.

Okay. Thank you.

Fredric Stahl, UBS.

Could I ask you, it sounds -- in between all this order chatter, it still sounds that you're seeing some green shoots across your businesses. Assuming that these green shoots materialize and we do get a better second half, is it still fair to assume that your mix gets better as the cycle picks up? That's question number 1.

Then I have to go back on the large orders. If I look at your large order, the print you had in this quarter is the second lowest since Lehman Brothers. Is there any chance that the market has changed enough for this to be a -- or a level around -- of orders that's the new normal. Is there anything out there that points in that direction?

Fredric, on the green shoots piece and your mix piece, it's not a secret here that if -- when the market comes back, our short-cycle businesses tend to be more profitable than our longer and mid-cycle businesses. So if you see a big increase in low-voltage drives, in the low-voltage products on those areas, they tend to be our most sensitive short-cycle businesses. That is a positive mix indicator, and the margin in those businesses are better than before. So a cycle pick-up in that piece would indicate that we would have some margin advantages. I hope that's what you're asking.

Yes, absolutely.

On the large order piece, if you're thinking is there a market collapse going on, is there excess volatility that we're seeing out there? If you look at our comments, what Eric and me and Ulrich were really trying to express through those comments is that we're not predicting any dire economic changes out there. We see orders. We see customers wanting to move at times. It's just slower than what we'd like to see at this point.

Overall, when you look at, internally, some of the leading indicators that we look at, as Eric mentioned, our short-cycle index that we use as a key indicator here, actually turned up for this quarter for the first time in several quarters. That's a good sign for us. There's some PMIs out there that we track, and I'm sure you track too, that have moved in a positive sense from overall regional country standpoint. Those are good signs too.

There's bad signs out there also in the sense of some CapEx spend and utility delays and those kind of things. So probably we just see different signals and we're cautious, but there's nothing in us that says that we're really pessimistic about the future or repeating something that we saw in the first quarter or second quarter of '09.

Thank you very much.

Sebastien Gruter, Societe Generale.

My first question would be on base orders; they were down 5% in Q2. Same decline as in Q1. I thought you said during the last call in Q1 that base orders improved through the first quarter. Therefore, I wonder if you have not seen a deterioration through Q2, or where there are meaningful different for you on your change in base orders as you went with the second quarter?

Second question would be on Power Systems. There is quite a disconnection between cash flow and your P&L performance for this business over the last few quarters. When should we expect this gap to narrow? Is it H2 or we talking 2014 or '15?

Final question would be about the -- if you could give us some color about the gross margin performance on your Q2 orders, given the lower share of large orders. Were there any meaningful impact on the gross margin compared to the one you have in the P&L at the moment?

On the base orders question, your base orders were down 5% in the quarter overall for all five divisions. I think our definition of base orders are anything under $15 million. I'd say I would be more alarmed with that number if it wasn't for our short-cycle index actually heading up that we've seen. So I look at that as more situational than I think it is a leading indicator that we're seeing significant drop in activity.

On the cash flow piece, Eric's going to pick that up.

We clearly see an improvement in the cash flow in the coming two quarters, getting to our year-end number, which is the typical seasonal pattern. Some of it will come in Q3; a lot will come mostly in Q4. The low number for the first half-year mainly has to do with Power reset, as I said before, Power Systems reset, but also timing of project payments, and some of those timing of project payments will also turn around in the second half of this year. So you should see already in Q3 some improvement on that number.

If I interpreted your margin question -- I'll try to answer it, if I don't answer it properly just tell me. We talk about Power Systems specifically and in Power Systems we've seen our margin and our orders that we're taking as actually going up.

As Eric said before in his presentation, that means that at some point in time when those orders start to feed in, which will be next year, hopefully, begins to, that'll be positive for the Company. That's why we're doing it. That's why we've made the decisions we've made to -- we'd say restructure and rewire Power Systems business and the margins have to go up based on what we've committed to the street and to our shareholders as we change our business.

Yes, if I can rephrase. On the, for Power Systems, at the current order level, $1.3 billion, would you be making the same absolute [operational] EBITDA?

$1.3 billion, I haven't done that calculation.

That -- again I think on the Power Systems you should not isolate them in one quarter. You should look at the overall accumulated number. And long term we have said with the two new targets on growth and margin, lower growth and higher margin target until 2015, that should balance itself out and produce the same absolute profit in 2015.

Okay, thank you.

William Mackie, Berenberg.

Joe, you've transformed the business since you've been there, right? You've added a third to revenues and changed the geographic balance of the business. I guess an interesting question from me would be, as you head off to new pastures, what do you feel you've left undone that sits there in front of you as you leave the Company?

And then perhaps more specifically with regard to Power Systems, if I come back to the detail, some very sharp falls accompanied by the reset, in terms of orders, not impacting revenues yet. But where should we think with regard to a two-year view about the reliable ongoing stream of revenues within the Power Systems business on a normalized basis following the reset and a change in the demand landscape? Thank you.

First of all I'd tell you I think we've made a lot of changes around here in five years but I would never just say that I have made these changes. I have had a great team around me. There's a lot of work that we did collectively to push this Company in direction. And I feel it's more market-oriented than it was before. I think it's more customer-oriented.

We definitely have balanced the regional geography with the acquisition in the United States. Splitting up Automation products, if you go back years ago into low-voltage products in DM, really exposed some real growth opportunities and frankly portfolio deficiencies that we hadn't leveraged in the business. And a lot of our acquisitions went to help to mitigate that.

I'd say -- if you say what's left undone, well there's always -- things are never the way you want them. I think first and foremost, and this is why I have a lot of confidence in Uli and why I was really happy the Board made the decision they did, is we need to execute on these acquisitions. It's not done.

Each one of these has their own areas of continued integration and synergy opportunity that we haven't completely realized. And then we have Power-One that we'll announce the closure of shortly which is a good bet for us, but there's a lot of work behind that piece that we're going to have to move from.

Secondly, Will, is services; we've put a lot of money in services up and down. And we're seeing the fruits of that but we still have a long way to go and we need to hit that target between 20% and 25% of revenues, that if we can reach. The team's committed to that. We continue to see good momentum in that piece.

It's really important that we follow through on that because in times like this where we're seeing volatility in orders and a lot of the concerns you guys are going to have for future EPS, the more that we can make sure that we can mitigate these kind of cycles with the consistent services business, that's going to help us overall.

Will, also there's -- when we did the Ventyx acquisition, there's a software component which is inside ABB that I think is a really important strategic future for the business. And we're really in good shape in the sense of realizing that. It's just we're going to have to continue to be aggressive in that area. And when I say aggressive I don't mean acquisitions. I mean aggressive in a sense of how we challenge our organization to really work around software and use software as a solution.

On the PS reset, Will, I'd go back to what Eric just said. When we did that, our goal was -- we think that when you look at the entitlement I would say margin within that business is more than a systems business because it is. There are product groups like high-voltage DC, like cables, that are buried inside that business that need a higher return. And so just treating into the systems business with 7% return isn't the right way to do it.

Secondly, none of us were happy with the volatility of earnings and obviously that went around EPC contracts. And mainly it was the C of EPC that was hurting us. And that's not necessarily the kind of business you want to be in unless it has a proper pull-through.

And so when we made that decision, is we said we were basically going to sacrifice a certain amount of sales and we were going to not lose margin in the sense of the overall margin dollars. And obviously that over the top of a lower sales base would have given you a higher amount of percentage profitability. So we had $1.3 billion of orders in the quarter for Power Systems. Don't take this and annualize it, okay? That's not what we expect here. Some of this is just the pushouts that we're talking about.

But in the context of our strategy, think in a context that will reduce the volume and will reduce a significant amount of volatility in earnings and will increase the overall earnings percent. That's the goal, Will, and I see it, especially with the margin increase in a backlog, I see that actually beginning to work. And I'm really pleased with the better project execution that we've seen in the first two quarters of this year versus last year.

Eric, you got any comments on that piece too? Because you know this well.

No, I think I alluded to it already when I talked about the targets and the traffic lights before. There were 7% to 11% growth target there. And profitability is more important that growth. As it looks today we are inside that range on the target basis. And obviously we need to see some growth in '14 and '15 in revenues to get into that 7% lower end of the range in 2015.

That's great. Thank you very much. A tiny follow-up relating specifically to Discrete Automation and Motion. I noticed that the orders have been falling in the Americas for the past two quarters and it's beginning to show up in the revenue line at least on a reported basis. Is that all South America or is there some trend picking up in North America as well?

Will, there's a lot of different businesses there, you have motors, you have robotics and different -- Brazil, South America, has not been strong for us and that's been a big part of what we see. In the United States we've had some issues, particularly around some segments in the market place, industrial segments, that haven't been strong quarter to quarter.

Again I don't see this as something that is indicative of a significant deterioration and it certainly isn't any share loss. It's just the US economy's been going sideways.

Eric, coming from that business too, you probably --

I think it's -- and also Canada on top of it. So part of it has to do with some larger orders in the context of the order types we have in DM, but Joe is right, it's also the flattish development in the overall market, but it's not an area of large concern.

You know what, I tell you too, is don't -- I know there's some concern about DM out there. Don't bet against that business, okay? They came in with 18.1% operational EBITDA for the quarter. Their portfolio is a good portfolio. It has good balance across the globe, including China, Europe, United States.

I'm very bullish on that business. It has some of our best businesses, from a margin opportunity standpoint, that are buried inside that business. I think that is a business that's in a strong position and it's been well run obviously and I think it has a good future in short term and long term.

Great, thank you. Same to you, Joe.

Simon Toennessen, Credit Suisse

My first question is on the Power Products division. I remember in Q1 you talked about positive mix effects from medium voltage and I wondered how this looked in the second quarter and what you're seeing for the third.

The second question is on mining. You talked about the issues potentially in more Greenfield-related, excavation-related. And maybe to give us a bit of better idea, if you could allude to what the split between Greenfield and Brownfield roughly is, just to have a better idea how that should develop.

And is it fair to assume that the service side in mining is above Group average?

And the last question is on the industrial motors and drives, which was again more negative in the second quarter. What's your outlook for that? And maybe in that sense maybe touch on the performance of Baldor in the second quarter. Thanks.

I think we had a good contribution from better mix in the first quarter. As you can see, the margin was approximately on the same level for PP in the second quarter, so we have not had any additional health problem from mix, but it remains basically the same as we had it before.

Obviously there is also then the mix on the geographical basis, which also plays in a little bit, but we essentially see that it's a balanced situation between Q1 and Q2.

On the Greenfield mining, Greenfield versus Brownfield. I never track the business that way. I think it's obvious right now that the mining companies, given the changes with the CEOs that are going on out there and then the real strong focus on productivity, that they're looking to optimize the assets that they have, rather than be expansive. And that's obviously feeding through into the kinds of CapEx that they're following through with and that's how we're pursuing those pieces.

On industrial motors and drives, you know it's a mix. Baldor's performing well, margins are still strong; they're still doing extremely well in the market place. It's helping our drives business there, as we had talked about when we did that acquisition.

But there have been some segments in the market place, such as coal mining and things, where you would sell a significant number of industrial motors, that have been hit because of that industry being down; we're very much aware of that. But we see other areas like gas and different areas where it's actually picked up.

So it's just more of a balance there right now than we see from an overall trending for growth.

Those businesses have a good international footprint. All around the world, both drives and motors, and overall they've been relatively flat when you think about it. Eric, again, you came from there, I think you'd know what you're seeing by region.

I think that's right. Part of what we said, in the very short-cycle business, which is trending upwards, has, of course, to do with some of those businesses. And that is partly in Asia and partly in -- the sequential data is also in the Americas.

Baldor is doing well, even if we have some headwinds in certain parts of the market in the US at the moment.

Okay, thanks then.

Martin Wilkie, Deutsche Bank Research

Just to come back onto Power Systems and some of the large orders. I think you made a comment on the media call earlier this morning that roughly 50% to 60% of the order decline was cyclical and the rest of it was your own selectivity. Just wanted to clarify is that was for Power Systems particularly or just large orders more generally?

And then related to that, in Power Systems, are you stepping away from more contracts than you had perhaps first expected, once you've actually sorted going through this motion of turning away some contracts? Has the level of what you're turning away been roughly what you anticipated or perhaps a little bit different? Thank you.

My comment on Power Systems' large order this morning, I said 50% to 60% of that. Just think about it. 50% of it is basically our decision, 50% of it is cyclical. I think that's the best way to think about it overall. And that was just for PS, we aren't making that comment for any other business, particularly PA in that sense.

On the turning away part, as I mentioned in the other question, is what we're walking away with versus Korean EPCs in the Middle East. We anticipated that and there's no surprise in that sense.

In the grid system side, I can say there's only one large order that we've walked away from, that we didn't pick up, and that was understood why we didn't want to do that. But there's not another large order in grid systems right now that I can point to, to say we've walked from.

We did several quotes that reflect the new margins and [risk] contingencies that we need in those kind of businesses. And we've even refused quotes on some, but they haven't been let yet to know what the result of those particular decisions can be.

So again not to be maybe too granular to you but on the substation piece, very predictable. On the grid side, it's too early to tell. So we're going to have to wait and see.

Okay, thank you very much.

Okay, Martin.

And with that I just want to thank you for your interest. Again from an execution standpoint, we've felt good about the quarter. I would -- as you make your decisions out there about ABB, I would say don't take the orders piece and necessarily linearize it or annualize it. I don't think that's what's going to happen. But we'll have to wait and see how the market develops going forward.

But regardless of what that piece is, we feel good about our future, our ability to execute, to continue on our cost-out modes, and to leverage what we think is a more balanced portfolio, both from an Automation Power standpoint and a geographical standpoint too.

And I want to thank you too for the relationships I've had with you over the years and I feel really confident in Uli and the leadership teams that will be left here.

So thank you and have a -- rest of a good day.

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