Abb Ltd (ABB) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB second-quarter 2015 results conference call. I am Selena, the conference call operator. (Operator Instructions) At this time, it's my pleasure to hand over to Mrs. Alanna Abrahamson, head of investor relations. Please go ahead, madam.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us today for our second-quarter 2015 results call. I am joined by Ulrich Spiesshofer, our CEO, and Eric Elzvik, our CFO. As usual, you can find a presentation on our website. This call is being recorded and will be available within the next hour.

Before we get started, please refer to the important notices regarding Safe Harbor and on our use of non-GAAP measures on page 2 of the ABB presentation. This conference call may include forward-looking statements. These statements are based on the Company's current expectations and current assumptions and are therefore subject to certain risks and uncertainties.

With that, I would like to now hand it over to Ulrich.

Before we get into details, let me summarize the second quarter. We continued our steady focus and execution in a challenging market environment. By driving our next-level strategy, we generated higher revenue and operational earnings per share against significant market headwinds. Let me highlight just a few points on slide 3.

We continue to deliver among our three focus areas. Profitable growth through our framework of penetration, innovation, and expansion continued to pay off and helped to mitigate the tough market environment. Orders declined 4%, which reflects the challenging markets we are facing and weaker demand in oil and gas, China, and the US compared to a strong second quarter last year.

Orders for the first half year are up 6%, driven mainly by large orders in the power businesses and supported by moderate growth in automation. We grew revenues by 3% in the second quarter on a like-for-like basis, the same as in the first quarter.

In line with our ambition to improve profitability, we expanded our operational EBITDA margin by 100 basis points with increases in three divisions. We continued to cut costs in line with our commitment to generate savings equivalent to 3% to 5% of cost of sales. We also started to see results in lower G&A expenses, down 7% year to date from our efforts to simplify the organization.

Most importantly, we delivered 9% growth in operational earnings per share on a constant-currency basis. We see this 9% growth in tough times as clear evidence that our next-level strategy is working.

Let's turn now to chart 4 for the key figures for Q2 in the first half year -- first half of the year.

The year-to-date growth in orders, revenues, and operational EBITDA margin remain at solid levels. Our order backlog is almost up 10% on a like-for-like basis versus the end of Q2 last year. That will continue to support revenues well into 2016 and 2017. Operational earnings per share on a constant-currency basis, excluding the foreign translation impact and other non-operational items, grew 9%. On a year-to-date basis, the improvement was 8%.

Cash from operations is down, mainly the result of positive revenue momentum towards the end of the quarter, resulting in higher current receivables and the lower associated cash from operations. We also had higher tax payments in the quarter compared to one year ago. Both of these are timing issues.

Let me now give you a perspective on the regional order performance on chart 5.

Orders in Europe were up 7% and higher in both power and automation. This was supported by large power transmission orders in France and the UK to integrate renewables into the grid, as well as orders for radar solutions in Germany, Switzerland, and Italy. Orders in the Americas were lower largely because of the tough, tough comparison with a strong second quarter last year. Then we [won] large orders in Canada, US, and South America. In the US, order growth in low-voltage products and power products could not compensate to softer demand in oil and gas and a difficult year-on-year comparison in the other division.

Asia was a mixed performance. China was weaker, as we cautioned during the quarter, while other important markets improved such as India and the Middle East. Base orders decreased slightly in the quarter, down 2% from second-quarter 2014. Base orders varied significantly by geographies, as you can see on the table. Our broad geographic scope helped mitigate some of the weaker demand in our larger markets.

Let me now turn over the presentation to Eric to take you through the financials in more detail.

Thank you, Ulrich. Let's move to our operational EBITDA bridge on chart 6. This quarter, we achieved $6 million positive in the net savings as we continued to compensate price pressure with cost savings. We also stepped up our actions to improve (inaudible) for activity, which started to pay off in the second quarter with the G&A expense rate down by 7% for the first half of the year. This is not part of the net savings calculation, but it's included in the Other category in the chart.

Net volume was positive, reflecting the leverage effect from higher revenues mainly in the product divisions. (inaudible) product execution supported margins in the quarter mainly in our assistance but also to some extent in process automation. Before the positive was the mix. This is mainly due to the higher side of revenues from LTMDM divisions which had the highest margin of the businesses in the portfolio. But also within process automation, there was a positive mix effect contribution. The other category consists mainly of a number of smaller one-off items.

As in previous quarters, we had a large negative for-ex translation effect -- more than $100 million in the quarter -- and we expect this trend and level to continue in Q3.

Finally, divestitures through the portfolio pruning reduced the operational EBITDA by about $9 million. These were the divestitures that we did during last year. This leads to an overall operational EBITDA of $1.58 billion and an 11.7% operational EBITDA margin, up 100 basis points.

Now let's turn to chart 7, which shows an overview of the divisional performance in the quarter. The highlight is the solid performance in LP, including decent order growth and solid margins despite the soft margins -- markets. Revenues have steadied to high in all divisions on a like-for-like basis. The decline in the operational EBITDA margin (inaudible) automation in motion is mainly the result of the lower sales of high margins down the product into the oil and gas sector. And the effect here was biggest in the US and in China in the quarter.

We have taken clear actions to adapt to the situation, such as capacity adjustment but also channel expansion and product innovations to further strengthen our position for long-term growth. Process automation reported 100 basis points margin improvement, and this is mainly the result of good order execution on a number of high-margin projects from the order backlog. As we move into the second half, process automation faces significant headwinds mainly from the oil and gas market as we continue to drive actions to minimize any impact from this.

Our products saw a slight margin decline. This was mainly related to production ramp-up costs, and they continue to deliver solid results in a tough environment. Power systems continues to turn around, recovering from an operational EBITDA loss of almost $60 million in Q2 last year to a positive $42 million this year, a 580-basis-point margin improvement.

The biggest news in cash from operations are in DM, which is down versus a very strong Q2 last year; and in PA, where we see the impact of project milestone revenue bookings late in the quarters, which resulted in higher current receivables. Now let's turn to chart 8 for a look at the capital side.

Cash from operations is lower in the quarter mainly related to timing differences. One was the timing of product deliveries and achievement of certain project milestones late in the quarter, as I just mentioned in PA. This generated higher sales and trade receivables on a local currency basis. Overdues (inaudible) remained steady during the quarter. We would like to collect this cash in the coming quarters. This, together with higher tax payments and other foreign translation effect, impacted cash from operations. In the first half of the year, excluding the ForEx translation impact and the higher taxes, the cash flows were near the same high levels as for the first half year of 2014.

We expect capital to normalize over the next two quarters in line with our solid track record in cash generation. Looking at our capital returns, in May, we paid off approximately $1.4 billion in the first (inaudible) of our annual dividend, and later this month, we will pay the remaining CHF17 a share, which would equal about -- approximately $400 million.

We are proceeding with the buyback and purchased 23 million shares this quarter at the value of around $500 million. Year to date, we have now purchased 44 million shares at the value of approximately $1 billion this year. Since the program was announced last September, we have purchased a total of approximately 77 million shares with a total buyback value of about $1.7 billion. This means we are close to 50% of the total [$4 billion] program we announced in September last year and which rounds to September of 2016.

So in total for 2015 so far, we are returning approximately $3 billion in cash to shareholders since the beginning of the year with the share buyback program and the dividend, while at the same time maintaining a stable net debt of approximately $2.8 billion.

Let me now turn it back to Ulrich.

Thank you, Eric. Let's turn to chart 9 and an update on how we are implementing our next-level strategy through our three focus areas of profitable growth, relentless execution, and business-led collaboration. In the second quarter, we continued to make progress in each of these areas. Chart 10 shows concrete examples of how we drive profitable organic growth through our pie framework of penetration, innovation, and expansion.

Successes in the second quarter include better penetration of OEM channels such as the European mechanical engineering sector. We have increased orders in the DM division from the sector by more than 10% so far this year and have more than doubled orders in DM and LP with several now jointly served key accounts. We achieved a number of innovation successes including innovation of the year for the new (inaudible) ship propulsion system that reduces Marine fuel consumption by 10% to 15% compared to their systems. We are expanding continuously into high-growth markets such as food and beverage that are a combined range of power and automation solutions drove a solid double-digit order growth so far this year.

These organic growth actions are part of the overall shift in the center of gravity that we described to you last year when we introduced the next-level strategy. If you turn to chart 11, let me quickly summarize what we mean by this. There are three elements in changing the center of gravity of ABB. One is to enhance the organic growth momentum, which is this part on the right of the chart. We do this by implementing our high framework and expanding in a targeted way into high-growth segments. On the bottom left, we show how we are de-risking the business by adjusting the business model, as we are doing, for example, in power systems. And in terms of economic cycle, that we aim for a better balance between early and late sides of businesses.

At the top, we strengthen our competitiveness by having more solutions offerings, pushing harder on our service business, which is already $8 billion of our total portfolio, and driving stronger our software (inaudible) differentiation such as further building our leading position in asset management software.

Moving to chart 12, in the second quarter, we made further progress in each of these three areas of (inaudible) the center of gravity of ABB. On organic growth, for example, we opened a new robotic sector in the US. The re-industrialization of the US is for real, and being a local manufacturer of robots with a strong global network behind us allows us to have better service and shorter lead time in this important high-growth market.

We have improved our risk portfolio in power systems through the divestiture of the US cable sector. Also, for example, our continued investments in low-voltage products are constituting to a better risk sell it in ABB. The second-quarter growth in this business is very encouraging.

On the competitiveness side, we continue to introduce new software and service solutions across all of our businesses. For example, for remote condition monitoring and servicing of both power and automation equipment installed at our customer sites. We are moving strongly to support our customers in the role of industry 4.0 that people, services, and things are fully integrated. This is an important competitive differentiator, and we intend to continue to be a leader in this field.

Let's turn to chart 13 for quick update on the progress of our step change program in power systems.

Now, here at this time we reported an operational EBITDA loss in power systems close to $60 million. We committed to bring the business back to sustainable profitability. In the second-quarter result, it shows that we are delivering the (inaudible) 80-basis-point increase in operational EBITDA margin.

In offshore wind, we continue to kick off key milestones in our remaining project portfolio. Our exit from solar EPC is now complete, and we are rolling out our recently announced partnerships in HVDC transmission and micro-grid. Growing the base business is another lever for profitable growth, and in the second quarter we grow our base service business in PS by more than 20%.

Turning to chart 14, we continued to shift our performance management from the historical focus on EBITDA through true operational performance such as health and safety, customer service, cost in cash. This step up in operational performance management is key to driving margin accretion even in tough times and establishing a strong performance culture. We continue to take out costs as it relates to 3% to 5% of cost of sales and reduce structural costs in G&A by 7% year to date. The 3% revenue growth and the workforce reduction of some 1,500 employees since the beginning of the year, we also improved revenue productivity at a 4% run rate year to date.

Turning now to chart 15, our new compensation model is one of the most important ways to drive a true performance culture. Many of you have asked how it works in practice. Historically, the system we use regarded everyone equally based on the total group performance, taking no account of how they performed as individuals. The new system sets full-year, individual, and Companywide targets and drives culture change by rewarding managers for specific metrics that they track individually as well as for the overall group performance.

In this illustrative example based on our 2014 performance, business unit managers who made their target under the past system would have received the same incentive as the one who outperformed; that is 86% of the total available amount. Under the new model, which is a combination of institutional and line-of-sight target, managers are rewarded for specific performance that they track individually. Here, low performers will see their incentive cut to 48%, but the outperformers would receive 113% of their incentive opportunity. We are convinced that this shift will drive the behavior and culture change needed to successfully implement our next-level strategy and achieve our value creation goals. Let's turn to chart 16.

Last quarter, we showed you how we combine our power automation offering across divisions to deliver greater customer value. This chart shows you how we drive and support collaboration and generate profitable growth by simplifying the organization, providing processes and tools, and optimizing the way we go into market.

One example is the newly shaped (inaudible) of our country managing directors whose clear and primary focus is to drive customer collaboration and to orchestrate the local ABB team to best meet local customer needs. This includes supporting our sales team through simplified back-office operations like the new regional shared service centers we are opening in Estonia and in India.

An enabler of simpler and faster collaboration in sales is the rollout of salesforce.com. Common tools cut administrative time and increase time of our salespeople with our customers. Another example is working together across businesses to make better use of both existing and new sales channels. Using a common channel strategy, we can, for example, add POCs and drive through our typical low-voltage product offering into electrical equipment distribution networks. That gives them a broader offering for their customers and brings them a higher share of wallet.

Turning to chart 17 and our summary, the order intake in the second quarter reflected a challenging market, particularly in oil and gas and in key markets like China and the US. Despite this headwind, we grew revenues and delivered 100-basis-points expansion in operational EBITDA margin. Operational earnings per share increased 9% on a constant-currency basis, giving us confidence that the next-level strategy is driving results even in tough markets.

On the outlook from a market perspective, the short-term picture remains mixed and there is still significant macro and geopolitical uncertainties. We continue to expect modestly paced growth in the US. We also see China continuing to grow but at a lower and slower pace than in 2014. The headwinds from low oil prices and foreign translation are expected to continue over the rest of 2015. However, we are confident that we can manage the uncertainties through the steady implementation of our next-level strategy.

With that, let me summarize. We expect continued (inaudible) savings, but the execution of our next-level strategy will enable us to stay on course. We remain committed to driving profitable growth and sustainable value creation in line with our target.

Before we move to the Q&A, let me remind you that we are holding our annual capital markets today on September 9 in London. We will use that opportunity to reflect on the first year since we announced the next-level strategy and share with you how we will drive accelerated sustainable value creation in the years ahead.

With that, I would like to conclude my remarks and thank you all for your attention.

Okay, let's open the lines now for questions.

(Operator Instructions) Ben Uglow, Morgan Stanley.

Good afternoon, Ulrich, Eric and Alanna. I had a couple. The first question, Ulrich, is really a general one. We've seen all kinds of different reporting by companies in the last couple of weeks. And, frankly, it's very difficult to actually figure out what's going on in terms of the industrial demand trend. When you look at ABB, could you just give us a general sense regionally of what is actually happening in the different geographies and maybe one or two end markets?

If I were to characterize the quarter, it looks to me like your base orders have drifted down again, and that's actually been happening for a couple of quarters. China, I would say, looks significantly worse quarter on quarter, US looks a bit worse, and maybe Europe is actually picking up and is the outlier. How do you see that? Is that a fair analysis of what's going on in your business?

The second question, very briefly, is for Eric. I don't really completely understand the mix effects going on in the margin bridge, which I know you love. In the first quarter, mix was $78 million negative. In the second quarter, it's $35 million positive. But you mentioned the highest-margin business is growing. It actually looks to me like the single biggest grower is actually power systems, the lowest-margin business. So can you just talk us through that?

Okay. First of all, good afternoon, Ben, and thanks for your question. I think you'll catch that it's difficult to see what's going on in the growth, and difficult to predict is absolutely accurate. That's the reality that we face at the moment. But let me try to give you a perspective going around the world.

If you look at Europe, the three largest economies, Germany, Italy, and France, recently carefully upgraded by a small notch -- but visibly -- their GDP growth forecasts, which gives us hope that Europe might be coming back at a decent pace. Spain is coming back in a solid way, and we see Northern Europe developing in line with what we expected in environments that we are in at the moment, meaning a moderate growth (inaudible).

If we move from Europe a little bit east and look at Russia and the Ukraine, that's definitely a very questionable situation there, and it's a bottoming out. But this is a very low-growth environment. In fact, it's further contraction to be expected.

Moving from Europe to the Americas, the North America -- it's really a mixed picture. If you look at the oil and gas side, it's pretty subdued. If you look at the related process industry, you will see some of the oil and gas hedges running out, and people are hedged relatively high oil prices. And then it will flow into the material cost and in the factor cost of, for example, the (inaudible) side, and we expect some positive impetus coming out of that.

On the discrete side, American automotive has found its way back and is really performing pretty well. And the good news is in automotive the complexity of every car is going up in terms of automation. More materials, more joining technologies, which is good, and that was one of the reasons why we decided to put a plant at the first one of the global players in through the North American market and get going.

Brazil is driven by a high level of political uncertainties and by some very significant macro headwinds, and we expect that to continue while we at last (inaudible) with Columbia, Peru, Chile. There is a solid growth momentum in debt markets that we can benefit from.

If you move then over to South Asia, in South Asia, the need for infrastructure is a good one. Another sector that is stronger is food and beverage because the market of food and beverage -- of packaged food and beverage especially is growing. People are moving from buying Ron Rice to packaged foods, which needs automation. And then if you go to Australia, it's pretty low since quite a while, and we expect that to stay there for quite a bit.

India has increased its outlook, and we see good momentum. Solar in India is doing very well. We just got a 300-megawatt order, which is a fantastic achievement, of the combined X Power One ABB solar team are really proud of what they're doing and we are definitely the leader in that fast-growing solar market. And also infrastructure investments will come up. And we will see the impact of reduced fossil fuel subsidies in India, and that money will go into infrastructure.

And then comes China. And in China, short-term, we have experienced and reflected very clearly a very soft market in the second quarter. I would expect that during summer this bottoms out. And then towards the end of the second half of the year, China should come back.

There is at the moment a lot of uncertainty on the financing side. There is the realization that a lot of industries on the process side have overcapacity, have now finally been reflected into buying patterns. And we have also some competitors that are actively leading prices down in China, which is a journey that ABB does not join. We continue to differentiate ourselves with innovation and high customer service, and we have strongly committed.

So as you can see, then, it's really a mixed growth out there. We have some positive elements in some end markets. Data centers are going pretty strong. Rail and rail infrastructure, an area that we have our proven once that that strategy that we don't do the tin box of a rail car. It's really just our propulsion solutions, which is going very well. So there are -- and the 3C industry is another one that we see having a huge amount of need on automation and power needs. So altogether, it's a mixed bag out there.

With our heat mats and our pie approach, we have a much more granular grasp of the market. Our teams are closer with the customers. We free up their administration time and give them more time with the customer. So altogether in a pretty mixed growth, I'm carefully confident that we will keep steady execution in the quarters ahead.

With that, I'll hand over to Eric for the second question.

Yes, Ben, on the mix, you have to remember that this is a quarter-to-quarter comparison. So we are comparing last year's Q2 to this year and also the same with Q1. And it's simply so that this is the mix between the divisions; some divisions have higher margins, some have lower margin from the revenue growth was then higher in the higher-margin businesses. And it's also an element of the mix really in the division that it's in on the lower product group margins in the division. So this is what the result is when it comes out, and it was negative in Q1. It is not positive this quarter.

Okay, that's great. Thank you very much.

Andreas Willi, JPMorgan.

I have also two questions, please. The first one is on process automation. If you could give us a little bit more granularity what's happening within that business. You've held up pretty well this quarter also relative to some other companies that have reported. Maybe you could just give us some indication how your maintenance and OpEx-driven business is doing in Q2 and what you expect later this year. And the CapEx business in the backlog, when that starts to get weaker, and also with the pricing is doing in the order intake there relative to what you are invoicing.

And the second question is on your disposal. You have made the high-voltage cable factor in the US to (inaudible) wire in tune. You built this factory about three years ago. What was the reason to exit that market, again, in terms of the strategy for the US cable business. And also maybe what was the revenues you will lose so we can model that? And whether the charge we had in power systems is related to the write-down on that factory. Thank you.

Okay, good afternoon, Andreas, and thank you for your two questions. Let me start with process automation. In process automation, if you look at the end markets that we are serving, oil and gas is definitely the one where the massive contraction of discretionary spending in oil and gas was a thing that we didn't expect at the magnitude that it came.

But thank God we have a strong backlog in process automation. We have a very agile way of addressing the workforce, and we had some great execution opportunities during the quarter. We were completing some milestones on some really large projects. And the team did a great job -- I have to say they really did a great job in executing this large project and pushing the revenue out. And that, you naturally found in the margin in this quarter. You should not expect the same in the quarters to come. PA is definitely being impacted by the contraction in oil and gas and are expected to carry on.

But if you take the other industries, if you take especially pulp and paper is since (inaudible) a couple of years on the low level, we have a good service business in there. We do some powerful upgrades in there. And that's coming along on the low level, but I think we got it well under control and it's working quite okay.

If you take, then, the metal sector, that's one that we are hopeful that the effect that I described before. The sector cost hedges that some of the customers have on your oil that they use to produce aluminum will go down. Or they will disappear, and then they can buy at low effective cost, which will stimulate demand.

If you take mining, mining is expected to basically drop to the level of CapEx of about 2009, 2010. The top 80 customers -- or the top 80 players in that segment spent in 2009 about $80 billion, $90 billion in CapEx, and that's probably where it will be coming down from about $150 billion last year. So we had a peak. But the good news is that if you look at the underlying quality there, there's a lot of power and automation combined offering that we can do.

We use the experience that we have in mining driving uptime yield and speed by combining power and automation really in a successful way. That what we have done in Boliden and Sweden has attracted a lot of attention, and we're using that to drive growth in the process automation division.

So basically, if you look at it, the drop in the oil and gas discretionary spending address is for real and it's very significant. But we are able to balance that off with other activities and with a strong activity with our customers in the other sectors to certain fees in process automation (inaudible) in the first half of the year.

And now, if you look at oil and gas, the amount of oil that is being pumped has not come down. So very soon, responsible operators will start spending again on maintenance and on uptime. Otherwise, they compromise uptime and reliability, which would be very, very dangerous in the times right now.

On the disposal of the cable sector in the US, when you run a business you need to look forward and see what is the right asset structure that you need to have to run your business successful. This factory was not part of that assessment, and therefore we decided to sell it. It's a tough call, as you can imagine, just having built this factory a couple of years ago. But things don't get better if you drag them on. So (inaudible) is rather when we realize we have an opportunity to improve, then we cut and we move on and we turn the page.

ABB has a very successful cable business globally, and we're expanding the cable business as we speak through new innovation and great product. We have a partnership formed with [Sals Myer] that in case we need capacity of the factory, we can still have it.

I think it was a very responsible move. It helps us to take out fixed costs. It helps us to address the more volatile market in a more flexible, resilient business model. And as you have seen in our center-of-gravity description, that's exactly what we are doing in terms of de-risking the portfolio, so I think it's well in line. And yes, power systems got hit a little bit by the divestiture because, as you can imagine, we've also (inaudible) new plant, and we got hit there in the second quarter. But it was the right thing to do. We turn the page and we move on.

Thank you very much.

James Stettler, Barclays.

A question on discrete automation motion where you had 120-basis-point margin decline. What will it take to bring that back to where you were before? How long will it take? What needs to happen there? And should we be expecting any further costs? Just looking at your portfolio rationalization, what we've seen in the last few quarters, should we be looking forward to more divestments, or has that been completed?

Okay. Good afternoon, James. On DM, if you take the pattern of DM in the second quarter, it was a really interesting journey. Because if we look at DM, we sell a lot of drives and motors, not only as new but also as a replacement in the upstream part of oil and gas. And given that customers are very, very careful there at the moment spending any money on anything, we had a very sharp drop in this high-tech, really great product. And they are good margin businesses, so we had a massive drop on that one.

At the same time, DM has a very strong franchise in China. As you know, we have really built that business in a very strong way. In (inaudible) robotics going very well in China. The actuation part, the motors and drives part, especially the part that runs through the channel, saw a contraction.

Now, on the contraction, as I said before, there is an end-market overcapacity in the process industries that will stay. The second piece is the distributors felt very strongly -- and I met a lot of them in the second quarter, and I was a couple of times in China. They basically felt uncertain about the financing conditions, and they are careful with stock levels. And thirdly, we have a couple of competitors actively leading prices down in China. Maybe we will not follow that path. So we will keep our great product. We will keep the innovation pace going. And we will ensure that we get paid for our offering.

So in terms of what needs to happen in DM, on the one hand, as every responsible entrepreneur, we're taking our costs in the appropriate segments to make sure we are weathering the storm. In the US, we have embarked on a very good, flexible work model that helps us to take down capacity and take down costs without laying off people, which I think is something important. And then if you look at the China piece, I'm optimistic long-term and medium-term that China will come back. Short-term, we need to manage through the drought that we see in summer and get through that.

Your second question was around portfolio optimization. You have seen -- basically since I joined ABB close to 10 years ago, portfolio optimization is a part of the daily job. First, in the first couple of years, we sold a lot. Then in the (inaudible) DM -- on the one hand, we pruned the portfolio; on the other hand, we made some significant acquisitions.

When I started as CEO, we did a sizable portfolio pruning around taking out [$1 billion]. And now with the cable sector (inaudible) to take something else out, which was not part of our future plans for driving ABB in the way that we wanted.

You should not expect any major disposals. We are basically -- we have done our homework on that one. But continuous fine-tuning of the portfolio and continuous pruning is a part. And we also need to see how the markets go, and that will drive the arrangements.

Great. Thank you.

Mark Troman, Bank of America.

First of all, I'm trying to just understand the demand commentary or the outlook, I think, related to, I think, the first question. Continued growth in the US, slower growth in China -- that clearly didn't happen in Q2. And then you talked, I think, a little bit about destocking. Is that outlook basically more a short-cycle comment that you have seen destocking in the US in China, and you expect that to improve in the second half? Or is it related more to the order pipeline you see in some of the larger projects? I guess is that outlook more short-cycle business comments or longer-cycle order comments? Question number one.

Second question, clearly the growth is obviously difficult for a lot of industrials. How do you see the acquisition environment? And you've obviously got a very strong balance sheet. Are acquisitions going to become a more important feature of ABB's growth plans? That's question number two.

And finally, number three, I think obviously over the last quarter we've seen [Sevian] take a 5% stake. And they've obviously been active on several boards that they've -- on companies that they've been shareholder of. What can you tell us about discussions with them? Thank you.

Okay. Look, Mark, on your first question, at the moment calling the world right and calling the market right is really an interesting challenge. Let me try to give you a little bit more granularity on the area that you are interested in.

If you take our order momentum in the US, we had a very tough comparable base to the previous year. If you look at the second quarter 2014, we had two effects. The one was we got some very large power infrastructure orders in North America; very strong ones, and quite a couple of them in the first half of the year in the second quarter of 2014.

Secondly, we had in the base businesses and the base product businesses -- we had what I would call the shale gas bonanza. There was really an enormous momentum in the second quarter of last year. This is not happening at the moment in the US. The shale gas bonanza is definitely on a hold, and we don't expect it to come -- that to come back very short-term.

And if you look at the power infrastructure spending, there's some really good tendering going on, and we are involved in quite some significant tender. Calling the timing on them is always difficult. So when you see market numbers from us, they have a certain assumption on what share of large orders will come. But they are really realizing the market is really developing, that they are not in a certain quarter is a very difficult call to make.

But I think on the underlying base business there is growth to be expected in the US on the low level. And then it's depending on how the high peaks that we have had on the base business in shale gas and the large infrastructure projects compensate, then, that drove elements. And that's basically what has happened in ABD in the second quarter of this year. This is the reason why the Americas have (inaudible) in the second quarter. If you look at it, we are down in the US 10, we are down in Canada 50 because we had a very large transmission infrastructure project and some shale gas related effects in the second quarter of last year. So that's the point that you wanted to know here.

The second point was around acquisition and the acquisition environment. We have said when we went out with next level, we see three drivers of growth. The one is a very strong focus on organic growth. And you have seen us with the better granularity and understanding on the organic growth opportunities really blowing a lot of investment in that field. I think this is the lowest risk growth opportunity. And knowing that you put salespeople and you get relatively quickly additional revenue is probably one of the best ways to drive the business growth in a relatively risk-mitigated way.

The second one is our partnerships, and I am quite pleased with the way they are going. We have formed some of them. And this is a pretty asset-light way of accelerating certain fields. You don't create any fixed costs. You don't have any CapEx. You just -- 2,000 partnerships in driving growth opportunities with a stronger combined capability base.

And then on the acquisition side, your read is right. We got a good balance sheet despite deploying $3 billion of capital returns to shareholders in the first half of this year, or at least committing to it. The last part of the dividend will now be paid in the next couple of weeks. We are ready from a balance sheet perspective to consider options on the acquisition side.

Now, what needs to come together is three things. One is the financials in ABB need to be in order, and I think we have done some decent homework that we consider some acquisitions on a medium size.

The second piece is we need to have the acquisition capacity. And if you look at where we were last year with the turnaround of power systems, the situation that we had in integration (inaudible) in base and power one, we have made good progress and we are more ready than there -- than before. So from integration capacity, we are also in a much better shape.

And thirdly, we need to have attractive targets available at a decent value creation story. And at the moment, the market is still a bit overheated. I think there is, in certain segments, quite a bit of ambition if you look at current share prices. So we want to be cautious because we don't want to only turn the money around; we want to create real value. We will continue to do bolt-on acquisitions. You have seen us doing contact in the first quarter; we will do more off that side. And when the time is right, ABB will also move onto a medium-size target.

And the last one is not a question around Sevian. Now, look, I expected that. We have (inaudible) Sevian's investment to ABB. They have deployed about $2.5 billion to ABB, which is a very serious, sizable investment. And as with every other shareholder, we are looking forward to have a constructive, positive, forward-looking dialogue. It is absolutely our commitment to listen to any shareholder that has put his capital at work in ABB.

We've got a very clear strategy on what we're going to do in the next couple of years. The momentum in the second quarter has now shown that we are able to better the market with steady execution. But any comment and input how to improve that further is absolutely welcome, and we look forward to a constructive partnership over the years to come.

And that's all I'm going to say because we will not disclose any details on individual shareholder discussion.

Thank you, Mark.

Thank you very much.

I ask that all future people keep it down to two questions so that we can have as many people asking questions as possible. So let's go to the next set of questions, please.

Daniela Costa, Goldman Sachs.

(technical difficulty)

(multiple speakers) Would you mind trying to disconnect and call back?

(technical difficulty)

We cannot hear you, Madam. I'm sorry. (multiple speakers)

As soon as Daniela calls back in, please put her through, then.

Yes, we can't hear her.

James Moore, Redburn.

Thanks for the taking the questions. I'll have two, then. The first question is on pricing. Could you perhaps update us a little bit on how that order pricing and revenue pricing is looking at the group level and how it's looking at divisionally and what sort of changes we see in there?

And the second question is on the short-term outlook and the growth comment for US and China, which you've had for a few quarters. I just want to be clear: are you saying that the US and China, where base orders declined 6% and 14% in the second quarter, you think will be positive year on year in the third quarter?

Okay, Jim, thank you very much for your question. Let me start with the second one. Look, we don't comment on the development of orders in the next couple of quarters. We don't give guidance. But as we shared with you, (inaudible) we see the market. And the market itself is growing in China. And the market itself is growing in the US at a much slower pace than the years before.

Now, we need to make sure that we get our share of the market. As I explained before, there are certain dynamics on a comparable basis. There on the steady-state business, we are participating. And on the peak on a comparative basis, you'll get price down, and that was the effect that we have had.

We do all, but it's in our hands to really drive our penetration -- especially the penetration effort in that case to mitigate the volatility effects of the peaks that we have had on certain segments to make sure that we get that into the growth pattern. We have an absolute commitment to drive ABB with total orders and with base order growth, and we aim to work towards that as strong as we can in the rest of the year.

Now, on the pricing side, pricing is a mixed bag really all around the growth. Because if I take the US first, take lower and medium voltage in the US, we had some competitors fighting in the last couple of quarters, getting at each other's throats, and that basically caused some quite strong reactions on the distributor side. We have now had one of the competitors that has historically let down prices, announcing a price increase, so let's see how this comes out. I think in the US, we should expect that the market balances itself out and we go back to a normal pricing environment. There are always US pricing pressures, but not as significant as it was there.

In China, it's similar. We have had a couple of guys very, very actively leading down prices. One of them even stated he wants to build installed base in low-voltage, which is an interesting business concept because there's not much service attached to the low voltage. But we leave them run their business, and we run our business our way.

We see pricing pressures in China, especially on the standard product distribution side. And here, we need to make sure that our new products that are coming out are beating all the others in terms of customer value. And have we got some great innovation coming that way. Our (inaudible) breaker, if you take that for example in low voltage, that product is selling because it has an extremely attractive value proposition, and it's selling very well.

So we will not join the game on the pricing side. And what we also will do -- and we have succeeded again in the second quarter despite some pretty tough environment to compensate price impact of our cost-out. You have seen, we have not only done SDM and quality in operation at excellence, our G&A is down 7% year to date, which means we really have done a lot of homework in that field. We have taken complexity out. We are establishing shared services. We are ramping now up India and Estonia, our shared service segments, to further affect the G&A.

So we are active on the cost side, we are responsible on the price behavior side, and we are very active on driving additional innovation through the channel. And with that, we should be able to address the challenges that are out there.

Thank you very much. Just on the US demand answer, on the oil side, I hear you talking about finding other channels. But do you think that the US oil impact on demand for you as a business will basically bottom this year and not continue into 2016? Or do you think 2016 will be another tough year in oil in the US?

James, that's a very good question. If you take the discretionary spending on oil and gas on the discretionary OpEx and CapEx side, I would expect that to bottom this year. And then you need to see what's happening with the CapEx side, both upstream and downstream. On the upstream side, we see some very cautious behavior on the longer-term CapEx side.

On the downstream side, it's really interesting. The lower oil price means also that products that come at the end of the downstream chain become more attractive. And there, we will have to see how these two effects work against each other. So on downstream, I'm less pessimistic. On this upstream side, for the next couple of years, there will be a subdued spending on CapEx side.

Thanks, Ulrich.

Thanks, James. Next question, please.

We have Mrs. Costa already on the line. Do you want to (multiple speakers)?

Let's try again.

Okay. Mrs. Costa, your line is open.

Thanks so much for letting me try again. Hopefully, the line is better now.

We can hear you very well, Daniela.

Okay, great. I have two questions. So the first one was is can you help us think through the power system margin recovery story from here on how that's going to be -- how you're going to get from the 2.5% to your targets basically?

And the second thing is regarding the cash flow evolution. And I know you said basically some of these were some deliveries towards the end of the quarter. It seems like it's quite concentrated in process automation. Can you help us understand by region, by end market, and exactly what was going on in a little bit more detail? That would be great.

Okay, Daniela, thanks for your questions. I'll take the first one, and I will give the cash flow question to Eric.

If you take power systems, we have basically got two tasks in our hand. The one is to execute the content M&A did historic backlog of projects and make sure we do them in a way that the customers are very happy.

On solar in EPC, the team has done, in my eyes, a really great job. We got that out, and we committed last year that they get the backlog out. It's done, and that business has stopped taking anymore new orders. We are doing very well on solar in terms of the overall order pattern, but with the new business model that we don't do EPC, we have to do (inaudible) product and service.

The second packet on the historic backlog is the offshore wind projects. And they cost a lot of money to complete. And if you look at the subdued margins still against our margin target range, 2.5% is nothing to write home about.

If you look where our vision long-term is, these projects will cost during this year. During this summer and, in fact, in the next couple of days, we have some very significant milestones. If we succeed delivering the milestones -- and at the moment, we are on track to deliver them, and you can trust that each of the three projects are being part of my evening prayers and even in checking every day.

We will have a significant easing both on the risk exposure and also in terms of the operating cost to complete its backlog. So for me on the offshore wind side, by the end of this year, we should have seen most of it through. We should have most of the costs done, and we should have also mitigated the risk downward significantly. So that significant drag on the margin, on the rest of the portfolio, will ease towards the end of the year.

Now, the second piece that we are doing is we are changing the center of gravity of power systems. We have basically reduced the EPC low-margin, high-volatility, high-risk EPC part in a very significant way. If you look at the backlog that we have built with all the new projects, it's a completely different quality backlog. We are also driving the higher-margin pieces you have seen, the 20% base order growth in service in the second quarter. We have a huge installed base all around the world.

We can do much, much more. We just recently -- for example, we met the install base in sub-Saharan Africa, and we have more than 150,000 original installations now in the system, which we didn't have before that we can go after. And then naturally the network management, the group consulting, the engineering piece there is also an attractive business that we're going to shape over time.

So what you will see basically is last year was the drop. This year, we are somewhere between the drop and the target range. Then we drop out of the drag that we had on the large offshore project. That will be a quantum step up in terms of profitability. And then we will work the business from the lower end of the ranges to the upper end of the ranges by changing the center of gravity, by making sure we do more on the engineering, service, software, and solution side over the years to come.

So it's a legacy piece that will be done by the end of the year. And as a forward business model change -- continued business model change and business center of gravity change that Lars and his team are executing already today and will be executing over the years to come.

So with that said, I will hand over to Eric to give you a little bit more flavor on the cash flow side.

The (technical difficulty), Daniela, for the cash flow. Out of this difference and the reduction in cash flow [about] $100 million is still translation effect. Of the remaining portion, about two-thirds is coming from receivables, from the milestones of product deliveries which are mainly, as you already spotted, in the process automation division. And then you have a portion which is also coming from a higher cash tax payment in the quarter, which always is a bit uneven pattern during the year how we pay the taxes.

And if you compare for the first six months of the year, 2015 against 2014, excluding the FX effect that (inaudible) tax payments, we are roughly on the same level at last year, which is a reasonable level. So the commercial on year to date is basically steady from the year before.

This is automation, as I mentioned already, and the introduction is down from a very high level last year. So the level in industry automation is still a quite reasonable level of what we have there. But we are working very hard to continue to drive cash and reduce net working capital, so we are seeing a stabilization and further improvements now in the coming quarters.

Thank you. Next set of questions, please.

Alexander Verga, Nomura.

I just wondered if you could expand a little bit on the commentary in low-voltage products with respect to your increased penetration offsetting the challenging conditions in China and the US. Obviously China and the US is very challenging, so I'd just like to understand a little bit better about exactly what is going on the other side of that. It would be very helpful. Thank you.

Good afternoon, Alexander. On low voltage, I think Tarek and his team have really figured out the pie formula to a really good way. I give you some very concrete examples. If you take the US, low voltage has grown in the second quarter in the US. And one of the drivers is that on the channel side, that we have now the legacy of ABB channel access. We have Thomas and (inaudible), and we have Baldor. Between the three of them, which they are historically separately run, there's a tremendous opportunity to help each other in pull each other's products into the general on the formula side. The distributors like it because they don't want to have that much complexity in their van, in their warehouses. The customers like it. So we gain a higher share of wallet of the distributors by driving that.

The second piece, if you take low-voltage products, a lot of people think that (inaudible) product, that's not true. There's a lot of differentiation that you can do on the innovation side.

If you take China, one of our best selling products that we launched a while ago is the free-at-home and the home automation solution, which is basically a retrofit solution that you rip out in your house the existing sockets; you put others in; and then you have a Wi-Fi-based -- an iPhone-based building control. And I can tell you that sells extremely well with the middle class in China who is very technology-oriented and trusts it very strongly.

And then as you move over to Europe -- I will give you an example in Germany. We train every year more than 10,000 installers. And these 10,000 installers, we can do much more together in the future. We are putting in now the solar offering from Power One and get that to our installers. We need to make sure that we and Bernard and Tarek are working very well together between low-voltage and medium-voltage, that we have a better collaboration on the channel on the front-end side between medium- and low-voltage and has a similar offering to our industrial customer space.

And the third one that I want to mention in Europe is the OEM -- the machinery OEM space. Historically, ABB would have addressed them with different sales forces. Now we go with one coordinated access through the OEMs. And you have seen we have grown double-digit now by doing that and putting in the product. So that the pie formula is really one that -- then you leave it right, then you actually hit that stride and you know exactly in which segments you are how strong and what you can do that's driving it. And Tarek has done a great job doing that while maintaining pricing discipline and not falling into traps like some of our competitors by trying to keep volumes by lowering the prices.

Okay, that's very helpful. Thank you very much.

Thank you. We will take two more (technical difficulty) questions. Next up?

Graham Phillips, Jefferies.

Two questions, please. Yes, just on pricing, a bit more of a follow-up. When you think about the overall pricing program, is there anything more that perhaps could be done? Because essentially it's only offsetting the cost-saving programs that are being offset by the pricing. So is there some way that maybe in terms of cost savings that you could increase the ramp?

And the second point is on your discrete automation division. I wanted to think about the progression of margins. I appreciate your comment earlier about the impact in China there. But also when you look at the third quarter, there's typically a higher-margin development. But with your new factory and the robots starting up, is that likely to result in margins being retired initially, or are a lot of those costs going to be capitalized?

Okay, look, Graham, thank you very much for your question. On the pricing side, one thing we haven't talked about is price realization. We always talk about how to mitigate the pricing impact. But the other thing that we are working on is how can I realize a good price with my customers. And it goes into all of the terms and conditions that we think you have. It goes into the overall (inaudible) of your value of your customers. And we have some dedicated programs going on pilot in those fields to drive pricing excellence and to increase pricing realization, and that's also a great way of mitigating pricing effects.

On the second one, your catch is right. We have been able to mitigate pricing impact to the P&L by our cost savings. We will give you an update at the capital markets day how we're going to look at that in the future. As you might remember, we introduced the concept of our day program, and that will be one of the core topics when we give you an update on September 9 what we're going to do in the future. You need to realize all cost opportunities, and we are ready to share more there with you in due course.

And then if you take the DM journey on the margin -- adjusted to take the robotics piece, and then I will let Eric cover that one. On the robotics sector, you should not expect a significant investment (inaudible) new activity. Mind you, we already had a side up there that we are doing service and installation. Giving that side a full value chain was not such a large investment that the depreciation would significantly impact the DM margin in the overall division level in the quarter to come.

Okay, I'm sorry; just a follow-up on after-market pricing. Is there anything you can say about any pressure that's coming to that part of the segment given that that's a significant portion of your revenues?

We have a lot of customers that come to us and say, look, we are a service partner of company X, can you reduce your prices? And our answer is we are working with a lot of them now to reduce the cost base jointly and addressing it. We have really a very good experience with a company that provides rotating equipment into the oil and gas space and who has been a long-term partner. They said, look, on the service side, I really can't afford at the moment. But (inaudible) okay, you're under cost pressure. And we set up a joint team to address the cost challenge that they have, and it has an amazing impact.

We got more orders out of that because the customer liked what we suggested there in terms of a joint offering. So we can't do that all the time. We cannot do that all the time. But in certain areas, we drive it, and I think it's a very responsible way to address the interest that the customer has, lowering his cost base to the end customers in a joint basis.

With that said, I hand over to Eric on the DM margins.

On DM margins, which obviously is trending down for the reasons that we have mentioned in the markets, the market turn that you are holding on our outlook is hard weather savings. It's tough conditions in the market. So we are making a lot of actions to improve and counter the margin development in DM. But we will not give specific estimates for the quarters that are right in front of us.

Okay. Thank you for that. Next set of questions.

Andrew Carter, Royal Bank of Canada.

Most of the questions have been asked, but if I could just try two. One of them was on process and automation where I think earlier this year, you talked about thinking that the backlog should be able to drive some sales growth in the full year. I recognize that hasn't been able to be done in sort of Q1 and Q2 and that maybe the outlook has deteriorated a little bit. But I wondered if you could give a little bit of an update and maybe talk about how the sales growth trend is differing in the sales that are coming through from the backlog and also in terms of base orders.

And then the second one was just on DM. And I just wondered if you could help us understand a little bit about the trend in the base orders that we've seen in Q1 and then into Q2 there.

Look, Andrew, let me take the DM one first and then move into PA. The DM portfolio is a pretty wide one. As you might remember, we have, from robotics to solar, everything in there, and singling out a single trend in any of this business would be very dangerous. So I will give you a little bit more granularity here.

If you take the four buckets -- take the industrial motion piece first. In industrial motion, I laid out already that the process industry demands on base orders for motors and drives is subdued at the moment. On the one hand, by end markets, which are soft, and (inaudible) motor more soft is the market and by our cautious behavior of the distribution partners that we have.

If you look at the power electronics piece, this is a pretty patchy situation there. We have some really good developments on the rail side. The rail converters and the rail infrastructure approaches are going very well, whilst the larger kind of orders on excitation and also (inaudible) on the medium side has not come through this year, and that's what you see in industrial.

If you take robotics, robotics is going very strong. And I'm very, very happy with their business development there both on the large orders and on the small orders on the base orders there. We have a lot of repetitive orders, for example, in China in robotics for the 3C industry. The customers are more and more penetrating their plants with more automation offerings. And mind you, robotics has also a very strong service offering. And on the service side, we enjoy great stability and a great quality of the business.

And then if you look at the renewables piece, the power (inaudible) integration from operational side is basically done. We have done it. We have also moved the brand from Power-One to ABB in a very successful way. The business is taking off from an overall orders perspective. At the moment, there's consolidation going on in solar inverters amongst all the players. You see that a lot of the smaller ones are disappearing. So when that's done and the (inaudible) is through, you will see a better base order quality and a base order margin quality coming out of solar.

So that's the granularity that I can give you. Calling it all together in DM, making a prediction for the next quarter, I would like to abstain from that going forward.

And then if we go into PA -- in PA -- PA has about a 30% service part in the overall portfolio. The most massive contraction is discretionary OpEx, and CapEx was around service. And that's the reason why you are seeing the order decline in PA there also.

Yes, we have had some large orders. If you look at the first half of the year, we have had some good very large orders. But the base service business contraction is one that was much stronger than we expected, let's say, in January. We have taken cost action. We have taken capacity action. As you can see, the business is still rising on an okay margin. But you should not expect the good margin that was created by revenue execution from a significant backlog project to continue that way because the mix between base order business in the backlog will change in the next couple of quarters.

Calling the timing on that one right, Andrew, I would be careful because at the moment the world is really so uncertain and volatile. I would expect that this year is the drop year and that next year it gets stronger again. But when exactly that comes back, I can't tell you.

So with that, I would like to thank everyone for their participation and their patience. I would like to remind you also that we sent out yesterday an invitation for the capital markets day. And that we ask if you would like to participate in the capital markets day that you please reply sooner rather than later. It will be in London on September 9 at the Hilton. So if you have any further questions, we are available here at investor relations. And thank you, and have a wonderful day.

Ladies and gentlemen, the conference is now over. Thank you for choosing Choruscall, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.