Abb Ltd (ABB) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2014 results conference call. I'm 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. (Operator Instructions). At this time, it is my pleasure to hand over to Mr. Ulrich Spiesshofer, CEO. Please go ahead, sir.

Thank you, Stephanie. Welcome, and good afternoon, ladies and gentlemen. It's a pleasure to welcome you to our Q2 results call. As usual, I am joined today by Eric Elzvik, our CFO. Let me also remind you that my remarks refer to the presentation that you can download from our website at ABB.com.

If you move to chart 2, before we get started, please refer to the important notices regarding any forward-looking statements made in the presentation.

With that, let's start with chart 3. In the second quarter, three areas stand out in particular. The first is order growth. I am very pleased that we see significant improvement in our order situation.

Last October, we said that we will drive organic growth through our strategic focus on penetration, innovation and expansion, and now we are delivering results. Our targeted actions have clearly paid off and supported an overall increased order momentum in the quarter, including our two largest markets, the US and China.

The strong order intake of plus 13% on a like-for-like basis was driven by a large as well as strong base order book development. This has brought us back to a positive book-to-bill ratio of 1.04. Most divisions were positive, which is really encouraging.

Secondly, our solid execution on revenues and cash is yielding results. Revenues amounted to $10.2b, steady versus a year ago, despite the $2b lower opening order backlog at the beginning of the year. This demonstrates a strong performance on order execution. Cash from operations improved by more than 60% to $888m in the quarter, as our net working capital improvement initiatives continued to pay off.

We delivered on our announced strategic portfolio pruning of businesses that have limited synergies with the rest of the portfolio. Since October last year, we have moved swiftly on our commitment to optimize the portfolio in a value-creating way and to strengthen our focus on the core.

Thirdly, we have made significant progress in our step-change program in power systems. Our division management, under the leadership of Claudio Facchin, has taken decisive actions to de-risk the PS portfolio, improve operations and to adjust capacity. And importantly, we are implementing a new business model for the offshore wind EPC business.

The Group operational EBITDA continues to be impacted by a loss in the PS division, related mainly to ongoing charges in some large projects. We have set a clear priority to fix this business long term. As we said previously, the situation is likely to weigh on earnings in the coming quarters.

Moving to chart 4, here are the key figures for the quarter. About half of the 13% order improvement came from higher level of large orders. The most significant one was a $400m HVDC link project from Canada in power systems that will connect renewable power sources to the North American Grid.

This is a good example of the kind of large projects that we want, with a more attractive risk/reward profile. We can provide significant customer value in our core technology area, where we have a solid track record on project execution. Out of the 14 HVDC live projects commissioned today worldwide, ABB has successfully installed 13 of them.

Base orders are also up 7% on a like-for-like basis this quarter. This is encouraging. It shows that our growth initiatives are generating results. We will come back with some examples in a few minutes.

As already mentioned, the negative PS result had an impact on earnings. In the remaining divisions, however, operational EBITDA margin was stable to higher, excluding the expected dilutive impact of the Power-One acquisition in discrete automation and motion.

So let's move to chart 5 for a closer look at the order development. First, these positive comparisons are with a soft 2013, especially on large orders, which were soft in the last year. However, order growth is encouraging in a number of areas.

As mentioned at the beginning, the book-to-bill ratio is back to a healthier level basically where it was two years ago. This will be supportive for our revenues, especially looking out to 2015. We are building up the order backlog again, with a good increase in base orders as well as in higher quality large orders. The early cycle businesses continue to see growth, and we expect to see more large orders coming in the next few quarters.

Chart 6 shows how this order growth was distributed regionally in the quarter. As already mentioned, the $400m HVDC order in Canada helped the Americas growth. Orders also grew at a double-digit pace in the US on a like-for-like basis, and Brazil improved from a low level last year. Asia was strong, led by good growth in China, where power products, low voltage products and discrete automation and motion all had good growth.

Europe remains a mixed bag. On aggregate, Europe was flat compared to a year ago, and we don't see much change in that going forward. Germany was higher, as was most of Eastern Europe. Orders were lower in countries like Italy, France and Sweden. Process automation had a good quarter in the Middle East and Africa, which drove the majority of growth in that region.

Let me now turn over to Eric to take you through the operational EBITDA bridge.

Thank you, Ulrich, and good afternoon all of you.

Let's turn to chart 7, where we have tried this quarter to give you a picture of the impact of power systems on our -- separately on our EBITDA development. We have the same categories in the bridge as in the previous quarters, but we have removed PS from each of them to show the performance in a clearer way.

If you start with the net savings, we are again able to offset the price pressures with cost savings, and in this context the PS impact is not material. We are also stepping up heavily the cost saving momentum for the second half of 2014. There is always a seasonal effect on the cost savings, but we are making additional efforts this year to step up these savings.

The net volume impact is negative, mainly reflecting the effect of higher selling expenses and R&D investments that we take now to drive the organic growth, which also has supported the overall order growth in the quarter.

The mix was mainly the effect of higher system revenues from low voltage products and DM. And finally, on the project margins, excluding power systems they will show a positive development, and that is basically based on better and improved project execution in process automation and low voltage systems.

Just to remind you, when we talk about project margins in low voltage products, we talk about low voltage systems business which typically comes from some 15% of the division's revenues. The other is the usual impact from G&A expenses and various other smaller items.

That brings us to the PS impact, which in total is approximately $180m for the quarter. The largest part is project related, but it also includes the impact of lower margin order backlog being executed for revenues as well as some mix effects. So this is the basis on which we say that the profitability of the Company remains steady versus a year ago, if you exclude the negative PS results.

We then turn to chart number 8, we had another good quarter on cash thanks to, in large part, our strong execution on net working capital management. We have a large number of improvements around the organization running improvement programs that is contributing to this development.

We are integrating the cash management into the successful process and productivity improvement initiatives and this methodology has proven quite effective, especially if you take a look at DM which has very good results on the cash side for the quarter.

Inventory turns have been a major focus across the Company, but we also continue to drive improvements in other large parts of the net working capital, like trade payables and trade receivables.

The net working capital as a percentage of revenue is slightly lower than it was a year ago, but we are still near some 17%. And as you know, our long-term ambition is to bring this back into our corridor which we have announced earlier of 11% to 14%, which we think is sustainable long term. However, it will be difficult to get into the corridor for 2014.

And with that, I turn it back to Ulrich.

Thank you, Eric. Chart 9 summarizes the key metrics by division. I won't go through all of them, but let me highlight a few areas in that field.

First, discrete automation and motion delivered a good top line, paired with solid underlying profitability and excellent cash flow. The reported operational EBITDA margin reflects the dilutive effect of the Power-One acquisition. As you may recall, we highlighted this at the time of the acquisition. Excluding that impact, DM showed a slightly higher margin on a high level.

In low voltage products, reported orders were stable. However, excluding the previously announced divestments, the remaining ongoing business improved in the quarter.

In process automation, orders were strong and the operational EBITDA margin and cash are up on good execution of oil and gas projects and continued strict cost control.

Growth initiatives in areas like rail and industrial power helped power products increase orders by 7% in a tough market. Good discipline on costs brought in another quarter of industry leading profitability.

Power systems orders are higher thanks to both large and base order improvement. As I mentioned earlier, these are orders with improved margins and risk profiles.

Let's move to chart 10, to see what we are doing in power systems. First and foremost, we believe power systems is long term fundamentally an attractive business for ABB. Worldwide, there are huge challenges ahead to manage the grid of the future, and there is no other company as well positioned as ABB to support our customers in this space.

Before we talk about it, we must fix the current issues. These are mainly related to a small number of high-risk projects, but also include some operational issues. As we have said before, we will fix this business for the long term. This means making fundamental changes and there is no quick fix. This is a marathon, not a sprint.

In the second quarter, we have taken and implemented decisive actions. We have focused resources on high risk areas and have assigned special action teams to critical projects. New experienced leadership has been appointed in offshore wind, and clear mitigation plans are now in place.

We are implementing a new business model for offshore wind, and from now on we will only bid for projects where we can share the risks more equitable with all of our partners. However, there are still a number of critical project milestones ahead in 2014 and 2015, and because of the complexity of the projects not all of the variables are fully predictable, so the risk of further charges remains in coming quarters.

In solar, we are no longer tendering EPC projects and expect approximately 90% of our solar EPC backlog to be finalized by the end of 2014. We are also putting a lot of focus on accelerating growth in the base business. These are smaller projects where the risks are more manageable and their margins tend to be higher.

So, all in all, this is positive news, and we are making good progress to deliver on our commitment to fix this business.

Let's move to chart 11 and an update on some of the actions we are taking along our three focus areas of profitable growth, business-led collaboration and relentless execution. As you may recall, this is the framework we have adopted to drive growth momentum into the future, with a strong focus on increasing earnings per share and cash returns from our investment in growth.

In China, our PIE initiatives around penetration, innovation and expansion have helped us to grow the business despite a mixed macroeconomic environment. Chart 12 shows some of the actions that we have implemented in China.

We have had good success in penetrating markets by expanding from tier 1 cities in Eastern China into the large tier 2 and tier 3 cities in the interior. Today, ABB covers 500 plus cities together with partners, and we have in more than 100 cities our direct own operations. Our ambition is to add another 100 cities with own direct operations within the next three years, while at the same time delivering even more of our solutions through China's rapidly e-commerce infrastructure.

Development of small, agile robots for general industry applications in China is a great example of how innovation drives profitable growth. We developed these robots to provide our customers in China with an economical, safe and flexible automation solution for a wide variety of assembly situations. We think this sector of the robotics market has a big future, not only in China but globally, and ABB in China is already the leader in this space.

Building our service portfolio has allowed us to expand into new businesses where the service tradition is still new in China. Our innovative service solutions around energy efficiency, for example, are a great fit with the government's new priorities for economic development and environmentally sustainable growth. With our nationwide service network covering all of our business lines and a strong ABB in China, this is a very attractive growth area.

Chart 13 shows you the same approach in the transportation sector. Here, we are focusing on rail examples. Rail is a market in which ABB can really deliver additional value, thanks to our combination of power and automation solutions. We cover the whole spectrum of customer needs as a solution supplier, from electric power infrastructure to high-speed propulsion and traction electronics to energy efficient turbo chargers used in conventional diesel rail applications.

As you may recall, we changed the way we drive these businesses last year by allocating certain cross-divisional industry verticals like rail to members of the senior management team. In this case, our executive committee member Bernhard Jucker, head of our power products division, has the responsibility to ensure that we capture the growth opportunities in rail across all of ABB.

So far, in 2014, the team has done a really great job. Orders have exceeded $1b in the first six months, and are almost 80% higher than in the same period last year.

We have a new R&D center in China dedicated to developing new solutions for our rail customers in Asia. We have also expanded our rail business by building up our service portfolio. So, this is another example how ABB delivers profitable growth through penetration, innovation and expansion.

Turning to chart 14, business-led collaboration is another key for ABB to grow the business organically in a robust way. Here is an example also from our transportation portfolio.

Earlier this year, we launched our onboard direct current grid system to meet the growing need of ship owners to reduce operating costs in a tough business and competitive environment. An ABB onboard DC grid currently operating on a Norwegian offshore supply vessel has generated fuel savings of up to 27%, which is a significant advantage for our customers in this competitive market.

This is a solution co-developed across four divisions, together with our corporate R&D team. It's a great example of creating superior value by using customer needs to motivate and drive more effective collaboration across the business.

Turning to chart 15, it's clear that ensuring the success of the step change program in power systems will continue to be a top priority and key focus of our relentless execution efforts. In addition, we have execution priorities in a number of other areas.

Net working capital is an area where good progress is visible in the quarterly results. This involves hundreds of different projects that is incorporated, under Eric's leadership, working capital management into the Group wide operational excellence program.

Business integration is another key area. We are ahead of plan on achieving the cost synergies on the Thomas & Betts acquisition, and the integration of Power-One is fully on track. This quarter, for example, Power-One successfully completed their planned migration from Power-One to ABB.

And as already mentioned, we have moved quickly on our commitment to optimize the portfolio. Let's move to chart 16 to look at this more closely.

Since I took office last fall, we have moved to divest five businesses with limited synergies with the rest of ABB, so that we can focus on our core business. Last October, we announced the Baldor's genset business, which was mainly a combustion engine based power source, basically outside of ABB's core area of electric power. We followed that in January with the full-service pulp and paper joint venture in Finland. As you may recall, this had a significant effect on process automation orders in the first quarter.

Since March, we have moved on three others. Two of them, Thomas & Betts' heating, venting and air conditioning and power solutions of Power-One, were closed in the second quarter. The announced divestment of steel structures from Thomas & Betts is expected to be closed in the third quarter. These transactions show how we have moved swiftly to optimize the portfolio in a value creating way.

Let's now move to chart 16 (sic) for my summary. To summarize the second quarter, our organic growth initiatives started to bear fruit with double-digit order growth. We delivered steady revenues close to last year's level, despite the lower opening order backlog.

We took decisive actions and implemented them to address the issues in power systems. Nevertheless, risks remain and are likely to weigh on our results in the coming quarters.

Cash flow improved significantly and is a good sign for a healthy business. We will continue to drive that improvement over the rest of the year. And finally, we continue to move quickly on our commitment to value creating portfolio pruning and focus on our core of power and automation.

Ladies and gentlemen, looking at the second half, the macro view remains as certain as it was three months ago. There are positive early cycle signals in some areas, such as US, and less encouraging data in others like some European countries. In this kind of a market, we will continue to drive profitable organic growth hard, business-led collaboration and relentless execution, and will accelerate the implementation of our successful cost savings program even further.

We feel more optimistic about the revenue development in the second half of the year than three months ago, but it will take some time for the order growth we are seeing today to fully flow through to revenues. Meanwhile, we keep the cost and productivity focus at high levels over the rest of the year.

Ladies and gentlemen, we are looking forward to welcoming many of you to our capital markets day in London on September 9. There we will present our strategy for profitable growth going forward, our new financial targets and our priorities for value creation and capital allocation.

With that, we would like to thank you for your attention and to open the call for questions.

(Operator Instructions). Simon Toennessen, Credit Suisse.

Thank you. Good afternoon, gentlemen. My first question is on offshore wind in power systems. Can you tell us what the completion rate is of DolWin 1 as of today? And also quite interestingly, maybe, could you tell us whether you are close to the maximum penalty charge that you have in for this contract?

Second question is on the strategy in power systems, and I appreciate that you will provide more details at the CMD in September, but in general would you ever consider partnering up with a different player in power systems to potentially share technologies but also risks of projects, or is that something that you would completely rule out as of today?

And the last question is on process automation, with some good order development in the quarter. I believe mining turned positive on a low base, but also marine and oil and gas orders seem to be still doing well. What is your outlook there for the second half, please? Thank you.

Okay. First of all, good afternoon, Simon. Let me go through the three points. On offshore wind and DolWin 1, look, the joint commissioning activities related to the systems installed in the offshore converter platform, they are really presently underway, and together with the owner TenneT we work on that basically day and night. Keeping in mind the complexities and the stakeholders that we have involved, if everything goes to plan, the DolWin 1 project is largely expected to be executed within this year.

And on the growth and the penalty charges, we don't -- the penalty; we don't disclose this amount. But we are highly committed to drive a successful execution of DolWin 1 within this year.

On the strategy piece, Simon, this is exactly what we're already now doing in certain fields. We announced the change in business model in offshore wind, where we are partnering up with others, in some cases with Able, how you have seen it in the new tenders. This is definitely something where we can benefit from by adding complementary skills and strengths of partners in the field.

And that's an approach that I personally like not only for that space; I like it for all of ABB. If we do want to do business successfully, the partnering mindset is one that we are going to grow in the next couple of years in ABB even stronger in a successful way.

And you have just seen we announced the partnership with Volvo on the truck and bus side. On the charging side, we have partnerships with other companies like Philips that we announced in the first quarter. So that's definitely a path that ABB will go to drive better growth and de-risk the business portfolio.

On PA, look, you picked it up right. I am quite pleased with the order development in the second quarter. At the moment, the tendering activities are significant and we are carefully optimistic about the second half of the year in PA's order intake.

Thanks very much.

You're welcome, Simon.

Ben Uglow, Morgan Stanley.

Yes. Afternoon, everyone. I had a couple of questions. I guess everybody is going to ask lots of questions about power systems, but I wanted to clarify something, Ulrich, that you said on the press call, that you reiterated the view that you could be close to breakeven in power systems EBITDA over the course of the year; at the same time, you're saying that there is a risk of further project charges.

Given that the first-half loss is $53m, what really are you signaling here? Is it that you do expect it to normalize but there is a one-off risk of a big charge at the end, or should we expect further losses on an ongoing basis in that division? So that was question number one.

Question number two is really it just sounds as if you have a little bit more confidence about the situation in power systems, and what I wanted to understand is, is that simply operational, i.e. that you've got dedicated teams in place and you can see what they are doing so your comfort level has gone up, or is it also financial, i.e. the guys have had a chance now to really go through the books, contract by contract, and figure out where the excess risks are?

Okay. Look, Ben, you are a sharp listener. In the first call you picked up the comments around the breakeven. Look, let me just clarify it.

We are firmly committed to be on or above the breakeven in the fourth quarter, and we will continue to aim with full force for a breakeven for the full year. So that's basically where we are at the moment, and that's what I wanted to say here. And hopefully that clarifies for you the situation.

On your second question around the confidence level, look, we have done unbelievable amount of work to really get a really good grasp of the business. We've got more resources with significant competence enhancement in place. We have a direct line responsibility, which has now a really good transparency.

The actions that we have decided to do are in full swing and are under implementation, the combined resources of ABB with the external partners, for example, the Alix Partner guys. We are really now on top of the things that are going on operationally, and we've got the right people in place and they're driving this project in a pretty down-to-earth, well-connected way, where the operational reality, we have a really good grip on it now, much better than we had a while ago.

So that's on the operational side. Look on the financial side, as with every new management, they have really gone under Eric's leadership through the books, worked through the current situation, and there also we have a much better grip on the situation. We understand the risks, we understand where we are in terms of the cost to complete, the cash to complete, so you got it right.

In this business, whilst we are not over the hill yet, and as I said, this power system, it is not a nice inheritance that we have, but we are now fueled up for the marathon run. We're going to get through, and we see the finishing line.

Okay. That's very helpful. Thank you.

You're welcome, Ben.

Andreas Willi, JPMorgan.

Yes. Good afternoon, everybody. My first question is on the market structure or the structure of these offshore wind orders you mentioned earlier. So it's a structure like we have seen earlier this year in the one that Siemens had one together with a partner. Is that already a structure you would be comfortable with in terms of bidding to win these contracts, or are you looking in further improvements in what the customers offer as well, in terms of risk sharing and overall risks for ABB?

Second question is on base order growth. The good step up, is that something that happened as we went through the quarter, or has there been a kind of sequential improvement during Q3? And would you expect that in terms of the run rate to continue to increase into Q3?

And the last question, just on the portfolio, you say the pruning is mostly done. Should we expect a pickup in M&A in the near term, or are you likely waiting with any larger M&A until maybe the power systems risks are reduced?

Okay. First of all, good afternoon, Andreas, and thanks for your questions. I'll take the first and the third, and I will then hand over to Eric to answer the second one.

Look, on offshore wind, I think it is a combination of what, how and with whom. First of all, what do you offer? I think it's very important to make sure that we offer proven technology in a field where we started the journey with high levels of technological uncertainty. So whether it is the platform itself, whether it's the power electronic solution or whether it's the installation approach that we use, it's very important that we look at the how -- on the what, sorry, to de-risk what we're doing. And that's one change that we are executing together with our customers, because it's their interest also to de-risk the setup of the project on the what dimension.

The second piece is the how. That means the commercial agreements, the way you put risk sharing into contracts with the customers, the way you schedule the projects, the way you align the time plans between customer and ABB, or sometimes the customer and some other providers like the alignment between there's the offshore wind park being built, that you make sure the time schedule between the platform and the platform builder is aligned throughout the course of the project and not only at the beginning, at the kickoff, and then later on when you have variances you don't follow up. That's important.

So that's the second piece. And the third piece is really around with whom do you go out there. And yes, absolutely, as I said before, we have decided we will use a partnership approach there, where we take complementary skills and really make sure that we benefit from strength of partners combined with our own strength. And if we get that right, then we're going to have a more successful business there.

So that's the change in the market dynamics that we are driving together with our partners, but that we also see the customers being very open with. In my last meeting with Mel Kroon at TenneT, we talked it very openly through. And I think this is something in mutual interest, where customers and us benefit the same way.

Your third question, around portfolio, look, when I took office we said, okay, how does our portfolio look like? What is distracting us and what is the core? We went through that. I'm really proud of what the team did in the last couple of months, first of all getting this business ready for the divestiture, then finding a good home for them, selling them at good prices.

In general, I'm quite pleased with the value creation that we got out of it, and then the disintegration and handing it over was done in a very good way. And yes, you absolutely got it right. We already have done a large part of that activity.

Now, going forward, our core focus will be on profitable organic growth, and we will add acquisitions at a time when we find it appropriate. And given the situation that we have at the moment in power systems, there is definitely an appetite to fix power systems or get it to a level of predictability and comfort to ensure that management is not distracted throughout that very important exercise too much by doing too many things at the same time.

With that, I hand over to Eric for a comment on the base orders that you asked for.

So, if you take a look at the base order over the last few quarters, it has been growing. Now we have a higher growth in the quarter, and I would say [it was done] successfully during the quarter.

Looking forward into the rest of the year, 7% growth is a good growth, and we assume that we'll continue to grow the base orders in this order of magnitude. Whether it will accelerate or not, we will see. The comparable in the third quarter is also a relatively low one, so we should at least see that level.

Thank you very much.

You're welcome.

Mark Troman, Bank of America Merrill Lynch.

Thank you. Good afternoon, Ulrich and Eric.

Hi, Mark.

Thank you. Okay, let's look at the inevitable question on power systems. Basically, I'm trying to get a kind of view on risks going into 2015, and from what I've heard so far, most of DolWin 1 and solar EPC, whatever, 90% of that should be done by the end of this year. Ulrich, could you give some sort of idea how much backlog or how much business do we have that needs to be executed in 2015, and I guess whether some of the newer contracts, for example, some of the Canada HVDC, whether that will be executed in 2015, or is that longer dated?

So I'm trying to get a view on what you have to execute in 2015. You've already told us what you're trying to do in 2014. That was question one.

Question two, two further short questions. Base orders doing well, but low voltage looks to lack a bit of momentum. If we could get a bit of commentary, what's in clearly a high-margin business, what's going on there in the market?

And finally, on cost saves, you talked about stepping up momentum in cost saving in the second half of the year. Is that in response to increased price pressure, or should we expect the spread of cost save over price to increase in the second-half bridge? Thank you very much.

Okay. Good questions. Thanks, Mark. Look, as I said before, on the timing of the projects, we aim to have DolWin 1 executed this year. And that is what the team is really working for and get that going to make sure we get some progress going. And I have to say, the collaboration with TenneT and the supplier, now that we have a different approach, much more hands on and directly, is really helping there, and I have a higher level of confidence than I had a while ago.

On DolWin 1, you are aware there was a technical issue that we were not faulty for that was influenced by basically the wind park provider. We're working with TenneT to get that one on track and sorted out. And as soon as that is sorted out, I am confident that we will switch grid and also finalize the DolWin 1 task, but this is not fully in our hands at the moment. This is strongly influenced also by the wind park provider that in TenneT's and our opinion, and we both share the same opinion, has caused this issue there.

Then you have DolWin 2. DolWin 2 is the platform that sailed out the Dubai dry dock on June 12. It is on its way around the Cape, and I'm really happy to share with you that yesterday it passed the Cape of Africa, so it's around the tricky thing, and it's coming now up towards the Northern Hemisphere. This project is planned to be completed within 2015. So this is basically the offshore wind situation.

Then let's talk about the solar piece. Look, on solar, we are disappointed how this was handled in the past, but I'm really encouraged with the team that we have put in place now. They're doing pretty well. And as I said before, we expect 90% of that business to really be fleshed out within 2014 and only small parts to remain in 2015.

These two buckets I want to clearly differentiate from the new HVDC order. The new HVDC order is bread and butter business to us that we can execute really well, where we've got good resources in place. As I said before, 13 of the 14 globally commissioned projects in the world have been done successfully by ABB, and this is another one. So this is our standard business. This is not something new. And I'm highly confident that the team will do a good job delivering this.

This is a multiyear project. This will not be done in 2015. This project goes beyond even 2017. So this is a typical long-term HVDC long-distance collection. We have, for example, 360 kilometers of sea cable on that one. We're going to connect it to the North American grid. It goes over to Newfoundland. So that's a project that I really like in power systems, and I look forward to harvest the margins out of that one.

Then we have the LP situation. I will ask Eric to comment on that one. I take first the cost savings approach. Look, on cost savings, when you have the opportunity to cut costs, you should do it, and we see an opportunity to widen the scope of our cost savings initiatives.

We're looking stronger to drive white collar productivity. And given the growth momentum, we really need to free up salespeople's time, as an example. So this is not about restructuring people. This is about allocating them to more value-added tasks by giving them better support and cutting costs in the execution on, for example, back office sales tasks, and that we are doing.

So, naturally, this is not only supposed to compensate price. This is also something supposed to either fund additional investment or be taken to the bottom line. And as we develop the successful implementation of these measures, we will decide how to take the funds out of these activities.

With that, I hand over to Eric for a comment on the LP side.

Yes. So let's take a look at LP, where we had a 0% like-for-like growth reported in the quarter. If you take a look really behind that, and with all the changes with the divestitures in LP from Thomas & Betts' side, if you really take this ongoing underlying business of LP and look at that during the quarter, we still had a reasonable growth in that area. And don't forget that LP is also a mix of product and a bit of systems, as I mentioned earlier on the call.

So we are satisfied with that. LP has also quite a bit of exposure to Europe, and as you heard earlier on the call, Europe is not a full clear growth pattern yet. So it is a bit of a mix, but we are quite pleased that we have reasonable growth in the underlying ongoing business in LP.

Okay. Thank you very much. Very clear.

You're welcome, Mark.

Daniela Costa, Goldman Sachs.

Thanks a lot for taking my questions. There's one main question and then two smaller things. My main question is you talk in quite a few of the slides about service and how you're still pushing for that. I believe you've been around the 17% level in terms of orders that relate to service now for a while. But a while ago, and I understand this is from before Ulrich's time, there was a slide at some point where we had penetration in the installed base of 25%, and you've aimed it to increase to 40% by 2015. Is that completely out of possibility now, or is that still a focus, basically, and where do we stand?

And then the other ones, I'm just curious, where are you in terms of CROI at the moment?

And the third one is also curiosity on why did you decide to not give the breakdown between pricing and savings this quarter? Is it just that the absolute levels of both things are basically the same as in the prior last quarter or two and so there's no message there, or the absolute levels of where things stand as a percentage of sales and then for pricing as a percentage of orders have changed and are not meaningful anymore to talk about? Thank you.

Okay, Daniela. Thank you very much for your questions. Let me address the service base quickly. Service is a fantastic opportunity for ABB. And if you look at it, we have now about 30% growth in service, and I'm really pleased with what we're doing there. Let me just explain to you what we are doing to drive this.

We have now hired many hundreds of service salespeople. We have set up a dedicated service product management where we basically packaged the offering, make it commercially viable, make it repeatable, basically have a solution ABB store for services that we go out and can sell with high impact, low risk and relatively lower cost to execute, because we have repeatable solutions that you'll get in that one.

Service is also something where we're not doing the classic lifecycle service. If you look at the value chain of our customers, we help them more and more on the planning side of their operations, with engineering and consulting, for example, on the grid side. We use a lot of software on the automation side to drive services to planning our automation assets.

And then on the other side of the value chain, if you look, for example, at the Ventyx offering around asset health, what we have both in the utility and in the mining sector, this is something that we are expanding very attractively, and I have a high hope and high expectations to that one.

So in terms of the numbers, look, it's always difficult when you do acquisitions, how the service order share develops, because you need to do it on a like-by-like basis.

If you exclude the large acquisitions, in 2010 we were at about 16%, and last year we were at about 19%, 19.5%. Essentially, we made some good progress, and we're going to drive that going forward.

The 25% to 40% installed base penetration, this is still the ambition, to get there. Now, given the vast, growing installed base through the acquisition, the 40% is much bigger than it was a couple of years ago, and therefore this target is probably a bit further out. For me, at the moment, it's important to drive the service business faster than the ABB overall growth, given our overall growth is a tough ask for the team, but they are doing a good job. And secondly, to ensure that delivery models on service are such that the service growth is accretive to our business.

So that's the topic on service. I hope that addresses your points, and I'll let Eric talk about the netting out of costs and pricing here.

And also the CROI. So let me talk on the CROI, Daniela. So, with the good cash generation that we have seen now for the first half compared to last year, on a rolling basis, we have improved the CROI compared to a year ago, a little bit, and that's in line with our announced desire to do so. Also, the net working capital effort, of course, helped to keep the capital base in place.

And on the bridge side, we have since a couple of quarters combined the price and the cost, because they really belong together. And we have showed the positive impact of that, which we still do this quarter is slightly lower, but we still have a cost saving above the 3%, in our 3% to 5% range. So it is really nothing new. It is continuing the same pattern as before.

And as I said, we will step it up more in the second half of this year compared to what we have done before, and that is both to make sure we counter the price differences and also obviously to drive the cost rationalization as much as we can.

Okay. Thank you.

You're welcome.

Fredric Stahl, UBS.

Hi. Good afternoon, gentlemen. It's Fredric here from UBS.

Hi, Fredric.

Hi. Good afternoon. Two simple questions from me. First, R&D looks like it stepped up quite a bit in the quarter. Is that a temporary effect, or is this a new level going forward, maybe reflecting your growth ambitions?

And then the second question is just if you can give us an idea what the profitability is of the steel structures business that you're selling out of Thomas & Betts. Thank you.

Okay. First of all, on R&D, Fredric, look, when you identify organic growth as an opportunity and you realize what you can do in terms of driving faster, in my eyes very attractive, organic growth, R&D investments are one of the drivers to really make sure that we're penetrating the market and have the right offering to the customer in the right place.

Therefore, we will continue a significant investment on R&D. We're already spending more than a $1b annually in R&D, and that's something that we will keep pushing. If you refer to the waterfall where we have basically sales and R&D together, we have invested both on the sales and R&D side, and I'm really of the firm belief this is a very, very good investment that will fuel further organic growth going forward.

On the steel structures business, we're not disclosing details on profitability on a detailed level. But I can tell you, given the size and the profitability of the business, the announced divestiture price that we have been able to achieve is a good price for us. And I'm really happy also that we found the right place, with the right owner, now, after the divestiture.

Very good. Thank you.

You're welcome, Fredric.

Martin Wilkie, Deutsche Bank.

Hi. Good afternoon. It's Martin from Deutsche Bank. Just a question on the power products margin. The margin there is pretty much around the average that it's been for the last couple of years, and I was wondering if you could comment specifically. You've mentioned for the Group generally that you're seeing cost offsetting price and also investment in R&D and selling. Is that dynamic essentially the same inside power products, so this level of margin is probably going to continue going forward because you're making these investments in selling in R&D and so forth to eat up some of those cost savings? If you could give some sort of comment specifically around the trajectory in that margin. Thanks.

Okay. Look, I think Bernard and his team have done yet another quarter of a wonderful job. I'm really proud. If you look at the revenue development in power products based on the lower opening backlog and the power systems situation, which is a customer of power products, given that and the market dynamics that we see, Bernard delivering 14.8% is a really solid performance.

He and his team have a nice, balanced approach to running this business. We have pushed up the R&D investments following our penetration, innovation, expansion approach, because we know now exactly where we're going to get a payback for investments in that space. We have committed to a margin bandwidth for power products that we will absolutely stay in, and we are ramping up now the growth.

If you look at the 7% growth in power products, in a world where infrastructure investments on the utility side are still subdued, investments, for example, in power solutions for the rail sector, power products' specified offering for the industrial space, this kind of investment has really paid off, both on the sales side and on the R&D side. So that's the point on power products here.

Okay. Thank you very much.

You're welcome. Now, I would say we take one more question.

Jeff Sprague, Vertical Research.

Thank you. Good day, everyone. Thanks for fitting me in. Just a couple. So a couple of questions there on price, and answers well understood. I'm just wondering also, on low voltage specifically, if you're seeing any change in pricing power and maybe discuss price in sales versus price in orders, if there's any difference there.

And then, on HVDC, I was wondering on these current projects, maybe give us some idea of what the expected margin profile might be or what it's been typically on programs that you've completed, and the mix of ABB content on these projects versus pass through and partner content?

And then, finally, I was wondering if you could address in any way, and if it's kind of a rough guidepost, but how much of your current backlog is deliverable in the next 12 months? Basically, trying to get a sense of what needs to be booked here really to kind of get to some forward-looking numbers.

Okay. Jeff, good afternoon. A couple of comments regarding your question. On the price situation in low voltage product, look, the price in the order is the price in the revenue. There's not much difference. This is a very short lead time business and it flows through very quickly.

If you look at low voltage products, it's really interesting. There is basically a Northern Hemisphere market and there's a Southern Hemisphere market. If you go in the Northern Hemisphere, we are very strong, established since many years, whether it's Europe, whether it's China, as strong markets. And now, with Thomas & Betts, we have a very strong not only brand but also access to channel in these fields.

Given the structure of this business, with a high level of complexity, many SKUs, high entry hurdles, local kind of requirements, this is a defendable, high-profit business, and I'm quite happy about that one.

In the Southern Hemisphere, where we are going very aggressively for expansion, whether it's South Asia, whether it's Africa, whether it's South America, and there we see competition from different fields. The benefits that we have in terms of our critical mass, in terms of the ABB setup that allows us to leverage SG&A across different divisions when we do new markets should give us a competitive advantage going forward, so I am confident on the underlying profitability of this business also long term.

On HVDC, look, we will not disclose details due for competitive reasons. All I can say, this is a good project with healthy margin. You might remember, we used to make money in power systems before the offshore wind and solar disaster, and these projects historically contributed to our profitability. And so will they in the future, when we have the other issues fixed in power systems.

Now, in the backlog, let me hand over to Eric.

Yes. Let me add to what you said, Ulrich. You asked also about ABB content, and it has good ABB content in those orders. It's a lot of products, both from PS and as well as PP, in those projects, so these are attractive ones. And we have quite a few of them also on the backlog that we are executing during next year and the following year.

Now, to the backlog. So, on a quarterly basis, when we enter each quarter we basically have 80% of the revenues in the backlog, with a higher number in PS and PP and the lowest one, obviously, in LP, which is not booked to bill -- book to bill. So it means we have fairly good visibility for the next quarter, and then if you look ahead, of course, it gets less and less quarter by quarter.

Thank you.

So this was the last question that we take for today. Let me remind you, we will be all looking very much forward to see you on September 9 in London at our capital markets there, where we will hopefully answer all of your other questions and give you an exciting picture of the ABB of the future. So thank you very much for joining us this afternoon. Have a nice day.

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