Abb Ltd (ABB) 2016 Q1 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q1 2016 results conference call. I am Maria, the Chorus Call operator.

(Operator Instructions)

At this time, it is my pleasure to hand over to Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and welcome to ABB's first-quarter 2016 results call. The press release and analyst presentation were published this morning at 7:00 AM and can be found on our website. This call is being webcast via our IR website as well as being recorded.

With me today are ABB's President and CEO, Ulrich Spiesshofer, and ABB's Chief Financial Officer, Eric Elzvik. They will give a review of the Q1 results, as well as an update on the execution of the next-level strategy.

Before we begin, I would like to draw your attention to the important notices on slide 2 of the ABB presentation regarding Safe Harbor and our use of non-GAAP measures. This conference call will include forward-looking statements. These statements are based on the Company's current expectations and certain assumptions, and are therefore subject to certain risks and uncertainties.

I would like to now hand over to Ulrich.

Thank you, Alanna. Good afternoon, ladies and gentlemen, and welcome to our conference call.

Before we go into detail regarding the quarter, I would like to pay tribute to one of our longest-serving Board members, Roger Agnelli, who passed away in a plane crash along with his wife and two children and their partners on March 19. Roger was an extraordinary man who contributed to the success of our Company for more than a decade with his profound knowledge and charisma, and was a good personal friend to myself. We will miss him very much.

Now let's move to the results on slide 3. We continued to deliver along our three focus areas of profitable growth, relentless execution and business-led collaboration in the first quarter of 2016.

Base orders were steady in the quarter, reflecting the positive effect of our focus on organic growth and of our new market oriented organization in a challenging environment. The decline in total orders reflects the very high level of large orders a year earlier.

The share of large orders in the quarter represented 17% of total orders, a very strong quarterly figure, however, still less than in the first quarter of 2015. The order backlog grew by 4%, book-to-bill was 1.17 and was positive, that means above 1, in all of our divisions.

Our continuous focus on relentless execution contributed to operational EBITDA margin expansion by 0.9 percentage points to 12%. The increase was operationally led by the power grid improvement, and ongoing group-wide productivity and cost savings measures.

We achieved further progress in power grids, and the division started its first quarter within its target margin corridor. The strategic portfolio review of power grid's division is on track. To ensure outside [in critical] perspective, we work on this review with external advisors during this review. We will report on this review at our Capital Markets Day on October 4 in Zurich.

We continue to drive self-help by focusing on growth opportunities in a disciplined way, and set up our capacity adjustment, productivity measures and cost reductions to mitigate the market headwinds. As part of the second stage of our next-level strategy, which we announced in September, we are accelerating our focused 1,000 day programs of white collar productivity and working capital.

Cash from operating activities was up $200 million, a pretty impressive improvement on better working capital management. Our four new customer-focused divisions are operational, and we're seeing the positive results.

To ensure better collaboration and more customer face time, we have established a common sales platform across the group with salesforce.com. The platform is today already operational in 86 countries. To help us drive first-in-class performance, we have announced and appointed Pasquale Abruzzese as Head of Quality and Operational Excellence.

Pasquale is an acknowledged expert and leader in the field of business transformation, operations and quality management. He was instrumental in the implementation over more than a decade of the Honeywell Gold operating system, a world class standardized approach which played a key role in Honeywell's performance turnaround. Pasquale is currently the Chief of Operations of Philips, he will be joining us on June of 2016.

Now let's turn to slide 4 for the key figures, we are focused on a few key points. Orders were 7% lower in the quarter, mainly due to the tough comparable as stated earlier. Base orders, however, were steady.

Revenues were minus 2%, primarily to timing of executing the order backlog and lower short cycle volumes. Operational EBITDA improved, and margin was 12%. An improvement of close to 90 basis points to 12%.

Operational earnings per share were up 3% on a constant currency basis, despite a decline in revenues. Cash flow from operating activities was $252 million, a significant improvement compared to the year earlier.

Now let me give you a perspective on the regional order performance on slide 5. Orders in Europe altogether were down 7% in the quarter. Last year, we had won a record amount of large orders in Q1 including the Nordlink order to provide a tower transmission link between Normandy and Germany of more than $800 million.

In the first quarter of this year, our large orders for Europe was not at the same level as last year were solid. And included a $250 million order for a high-voltage submarine cable system for the UK, as well as $140 million high-voltage direct currents converter station order. We also won equipment orders for specialty vessels, specifically in the cruise ship as well as in electric and hybrid ferries.

The base orders in Europe grew by 6%. The table on the right shows the development by country, so for example, Germany grew 5%, Spain 27% and Turkey 24%. Norway and Italy were flat, the UK was impacted by a really difficult comparable as there was a very significant amount of small orders booked in the first quarter of 2015.

Total orders in the Americas declined 13%, and base orders were 10% lower. Total orders for the US were down 13%, due to lower industrial demand for power and automation solutions going into process industries such as oil and gas and the mining and metals sector.

US-based orders declined on a difficult prior-period comparable. Canada and Brazil are down as softer demand for the resource sector was felt.

Total orders for Asia, Middle East, Africa declined 2% compared with a very strong quarter a year ago when we secured a large marine order. Base orders grew 3% for the region, China grew 16%, primarily due to the $300 million HVDC orders that we won this quarter. China's base orders declined slightly compared with the same period a year ago, following three quarters of double-digit declines.

Despite the oil price uncertainty, double-digit growth was achieved in Saudi with robust orders in the Gulf countries. Southeast Asia also saw strong double-digit growth of all the market development in Japan, Korea and Australia slowed. This development really shows that our PIE approach of penetration, innovation and expansion in a targeted way works even in a different market environment and that our broad geographic scope helps us identify and drive growth opportunities.

With that, I'd like to hand over to Eric to give you granularity on the divisional perspective.

Thanks, Ulrich. On slide 6, we can see the divisional performance.

In the Electrification products, good order growth in Europe was more than offset by weaker demand in the US, China and Brazil. The lower levels of medium voltage products and low voltage products being sold in the industrial sector could not offset the positive development in construction and utility. Revenues were steady, and operational EBITDA margin was impacted by an unfavorable mix.

Actions to address capacity and shift in demand were initiated in the quarter. In Discrete Automation and Motion, orders were impacted by weaker demand in the resources sector, oil and gas, mining and minerals.

Third-party base orders declined 5%. Revenues were lower on short cycle business and the timing of the order backlog.

The decline in the margin was primarily due to lower volumes and underabsorption. However, capacity adjustments are well underway and margin improved sequentially Q1 2016 over Q4 2015. The [goal] is aiming to be within the target margin corridor on the full-year basis.

The Process Automation division saw a decline in orders due to the substantial drop in large orders compared to a year earlier. Service orders were up in the quarter, but so far the base orders were down slightly.

Revenues were lower as growth in services and marine partially offset the decline elsewhere. The margin decline was due to an unfavorable mix, although it was partly offset by cost and productivity measures.

In power grids, orders declined, mainly because of exceptionally large orders won in Q1 2015, which Ulrich already had mentioned. The base orders behind this grew 9%, with a strong underlying performance in China, Saudi and Spain. The slight drop in revenues were primarily due to the execution of timing of the backlog.

Power grids reached the target margin corridor were 8% as a result of this ongoing step-change program, the improvement in the project margins and the continued cost-out measures. In addition, corporate costs were positively impacted by a cumulative elimination of certain intercompany insurance results.

Let's move to our operational EBITDA bridge on slide number 7. In this challenging market, we achieved approximately $85 million of net saving. This includes the benefits that we have achieved regarding white-collar productivity in the quarter.

The net savings were partially offset by negative net volumes with the decline in revenues, as I mentioned earlier. Most of the project margin's improvements came from power grids, as the division continues to successfully execute on the milestone of their program.

Mix was approximately at zero, as fewer system orders were offset by standard products in this quarter. As always the other category consists of many smaller items which are up. Included here is salary inflation, changes in corporate provisions like insurance reserve this quarter, realized foreign exchange gains and losses, and certain commodity supply chain costs and other smaller ones.

And as in the quarter the year earlier quarter, the ForEx translation had some negative impact, but much less than what we have had in the prior periods. All of these changes led to a group operational EBITDA of approximately $943 million, and an operational EBITDA margin of 12%, an increase of 90 basis points.

I would like to remind you that the restructuring related WCP for 2016 is expected to be approximately $300 million to $400 million. The majority of this we would expect to be booked in Q2.

Let's now turn to slide 8. We continued to improve the cash generation in Q1. Cash from operating activities was up by approximately $200 million in the quarter.

We have put a strong focus on working capital improvement measures. Particularly inventory reduction, but also receivable collection within the implementation of the continuous value chain improvement systems that we are driving throughout the operating units in the group.

Our cash distribution to shareholders will once again be done in the tax efficient manners. If approved by the shareholders, the proposed dividend payment of CHF0.74 will be paid out in July 2016.

We continued our share buyback in Q1, purchasing shares with a buyback value of approximately $500 million. So in total we have repurchased shares for about $2.7 billion since the program began 18 months ago, and we're on track to finalize this within the year as planned. As you can see, we continue to deliver on our pledge to drive sustainable value creation for our shareholders.

Let me now turn it back to Ulrich.

Thank you, Eric. Let's turn to slide 9.

We launched the second stage of our next-level strategy in September 2015 to accelerate ABB's transformation. Stage II comprises a significant set of actions to drive the shift of our center of gravity towards higher growth rate of competitiveness and lower risk, as well as the acceleration of programs to improve productivity and capital efficiency and further measures to simplify our organization. Implementation of stage II continues along the next-level strategy's three focus areas of profitable growth for relentless execution and business led collaboration.

Now let's turn to slide 10. So when we look into shifting the center of gravity for ABB, how are we really improving competitiveness?

One way is by enhancing our offering through what we call software-led differentiation. For example, by driving the development of our offerings for the industrial digitalization and the Internet of Things, services and people that we call IoTSP.

The growing share of renewable energy and the power supply adds a lot of complexity to the grid, which requires innovative technologies to manage the grid overall, the flow of the electrons but also a drive solutions to manage the flow of data. With our unreviled knowledge of electrical energy and industrial automation, we're ideally positioned to drive the digital grid.

ABB Technology was selected the for the UK's first digital substation, and for an example is shown on this slide. We are providing the customers with this improved control, higher safety and reduced maintenance costs while integrating the renewables.

Another example of our leading platform in industrial digitalization is our container terminal automation building that on our strong experience in IoTSP for this site. Through our automation systems and remote operation solution, we're able to control cranes and drive systems for all driverless cranes in the terminal. This makes the customer container terminal operations safer, greener and more productive.

Slide 11 shows concrete examples how we drive profit level organic growth through our PIE framework of penetration, innovation and expansion. In terms of market penetration, we really made solid progress in Europe where we grew the base orders by 6%.

In the region, we are deriving the first benefits also from the combination of our low voltage and medium voltage sales channels in the new Electrification Products division. The new market focused organization is really enabling greater focus, much better coverage of customer needs from one single organization, and thus yielding positive results.

Innovation continues to be a focus for growth, and we introduced many new products and solutions in the first quarter as well. One is our new smart sensing solution with which transforms assets like simple motors or transformers into intelligent machines that tell the customer when they need servicing, and help therefore with up time speed and yield in industrial processes.

This innovative solution makes condition monitoring the new standard for assets in industry. And means also small and midsize companies can benefit from the advantages offered by the IoTSP, giving our customers a truly decisive competitive advantage in running their operations.

We are also continuing to expand into high-growth markets and geographies. In transportation, we launched a new electrical power system for cruise ships called Dynamic AC Concept that serves the Marine industry that we already provide well-established products and systems such as our Azipod propulsion solutions and DC electrification.

The solution helps to reduce annual fuel consumption by up to 6%. On a large cruises hip, this could equate to 2,000 tons of fuel savings every year.

Now let's move to slide 12. In this environment, we continue to drive self-help by accelerating our relentless execution [therefore] around the 1,000 day white-collar productivity program as announced last September. Key actions include the optimization and consolidation of business functions into centers of excellence, like for example a fitting center for large projects out of India and support functions into streamlined shared service centers.

We intend to reduce the globally shared services support centers into four regional and two global centers from 68 today. So were moving from 68 to 6.

We have announced the locations of our two global business service centers, Bangalore and Krakow, and have already filled the key management positions. In Bangalore, the first wave of functional activity transfer is already completed. So for example, HR was migrated from Australia, and accounting from Singapore, Southeast Asia and the Gulf countries.

The next wave of countries is well on track. The global HR delivery center also was established. These efforts keep us on track to deliver the $400 million in savings that we committed for the program in 2016.

Turning to slide 13, as announced when we launched the stage II of the next-level strategy, we're also accelerating our working capital program with aims to foster a cash flow growth culture. Meaning, freeing up cash to grow our business from within. Collection of receivables was strong, as well as inventory management.

We now have well over 1,000 improvement actions across our activities around the world that are currently being implemented. We're driving, for example, value chain excellence from product design through manufacturing logistics. As an example, in our motors and generators business unit, we have achieved improvement on their net promoter score from customers on the one hand, sustainably upped the inventory turns and achieved therefore a double-digit reduction in inventory in this business unit.

Overall, the 1,000 day program on working capital is targeting to release about $2 billion in cash by the end of 2017. We are well on track, as we have freed up approximately $600 million in cash for growth in the last 12 months during the ramp-up phase of this program already.

If you go to slide 14, as you know, in January 2016, our new market oriented divisional structure came into effect. We realigned our business divisions to serve our customers better by organizing ourselves around our customers much more than in the past, and reducing the amount of divisions from five to four.

We're seeing truly positive results from these actions. The customers like it, and the feedback overall is very positive.

They are now able to buy a more complete ABB portfolio from one division, and receive faster deliveries and service. The changes have also enabled a further simplification of our processes to enhance our agility and customer focus in a tough market environment.

So turning to slide 15, let me summarize. We expect the challenging market conditions to continue, and to face continued [cost measures] saving in many segments. Therefore, we will continue to focus on self-help, which means concentrating on driving growth in target segments and realizing the benefits of our new structure and focused execution initiatives.

Our growth programs are performing well, even in challenging markets. And we will continue to target above average growth in markets such as Africa, food and beverage and microgrids where we see particular potential. We have already undertaken significant capacity adjustment in those businesses that have seen lower volumes through low oil price and other market weaknesses and uncertainties.

At the same time, we will drive forward our accelerated execution programs of productivity and capital management. Having laid the foundations for ABB's transformation with a leaner, more customer focused organization, we are well positioned to better continue in market headwinds and drive profitable growth for the long term.

We have announced that our Capital Markets Day will be on October 4 in Zurich. During this event, we will give an update on our next-level strategy, and also report on the strategic refuel of the power grids division.

So in closing on slide 16, ABB is a pioneering technology leader with strong positions in attractive markets, and we have demonstrated this quarter what we can get out of this positioning. We have a crisp and clear transformational agenda to drive earnings per share and cash return on invested capital, which we are implementing with great rigor and perseverance.

We remain committed to deliver attractive returns to all of our shareholders. As demonstrated within the first quarter and with the achievements over the last 1.5 years, our next-level strategy is delivering positive results and we will continue to accelerate sustainable value creation.

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

Let's open the line now for questions. I would like to remind everyone we will limit questions to two questions per analyst.

(Operator Instructions)

Benedict Uglow, Morgan Stanley.

Good afternoon, Ulrich, Eric and Alanna. I had a couple of questions. The first one just relates to the China business in particular, and getting a bit more color for what's actually going on there.

If I look last quarter, your business in China was down 21%. This quarter, it's virtually back to flat minus 2% in base orders and up in overall orders. When I read the press release, obviously, it doesn't sound as if Electrification or Discrete Automation had a big change in China, i.e. the improvement is down to Power.

But perhaps, Ulrich, you could give us a sense of what you are seeing sequentially in the evolution of your low-voltage in the industrial automation businesses in China. So that was the first question.

Second question is for Eric. Obviously, the calculating the net savings each quarter is going to be a little bit difficult. Could you help us with a bit of guidance on the run rate? $85 million in the first quarter of net savings is quite high. Unless my model is wrong, that basically is bigger than what we saw for pretty much all of last year on net savings. Do you expect to maintain that current run rate, or what might be the puts and takes? Thanks.

Thank you very much, Ben, and good afternoon to you. On China, it's a really interesting situation overall. Let me just take a step back and look at the overall picture.

China is going through a transition period from an investment-driven economy to an innovation and consumption driven economy. I was just, in the last half a year, I think about four times in China. And I was just there a couple of weeks ago again, and what you see there, I think they have a government which has a very clear plan what they want to do.

They realized the size of the challenge that they have in hand. But when we discussed a couple of weeks ago with the Chinese government at a venue that 13th 5-year plan of China, I had a big smile on my face. Because basically, this 13th 5-year plan matches very well ABB's capabilities and strengths, whether it's cleaning up and having more environmentally friendly power generation, whether it's long-distance power transmission, whether it is the automation and industrialization of the industry or e-mobility, ABB is pretty strongly positioned in that field.

Now when you look at the granularity, I'll give you a little bit more granularity of our numbers there. We are proud where we are at the moment in China, without being arrogant. I think Chunyuan Gu, our Head of China, and together with his team is doing a great job. And what is happening really there, on the one hand if you look on the power grid side, we have invested significantly over the last year in leading-edge technology on the ultra high-voltage DC technology. And this is something that we are really truly leading, and state grid and other customers in China have seen it and have given us quite a bit of orders recently to support them in the move towards a more stable, larger, and more digital grid in China. So we are well positioned there.

We got large orders, but we also got a very, very nice momentum on the base order side. For example, on high-voltage products where the localized production in China is really paying off. We got great in China for chain of products in that space, and we now benefit from that one.

The second piece outside of the power grid, if you take the perspective overall, is truly a mixed picture. Anything that's close to the soil, meaning growth in industries, meaning mining minerals, oil and gas, is pretty tough at the moment in China. And the government has literally realized they have too many assets, they have also realized they have too many people and they are now relocating them in different base.

If I look however, there are pockets of growth that we can identify on the industry as well. The automotive industry in China is still growing. It's now the largest automotive market. And if you look at the complexity of the vehicles that are being put together, the automation needs are quite strong. And we have a long franchise there. We were the first global player that had a local value chain in robotics, for example, and really that one is one that we enjoy continued strong customer relationships in electrification.

Anything that goes into process industry on electrification was very weak, anything that goes into residential, we saw small uptick. And especially when you look at our new product that we have brought out, we are targeting the middle class in China with some pretty attractive products.

For example, the retrofit three at home solution that we launched a year ago in China, this is paying off very well. And this retrofit solution that you basically can control a home with an iPhone is paying off very, very nicely and we see some solid growth in that one.

And on the process automation side, clearly, the process industries itself are soft. But on the other hand, if you take for example the Marine sector, that's where we enjoyed quite a bit of growth. And when you look in Marine on the harbor side, there's also still some investments that are going on. So what's very important for us is that we fly on side and have the granularity of the market in mind and really focus our assets in them.

The last comment that I want to make on China is, if you look at the Chinese, I really call it a continent. We have been very strong at what I typically call the Eastern banana, that's the East Coast, and we're pushing now very strong in a better collaborative approach than before into the western regions. We have many, many cities in that area that have more than 1 million.

Historically, we would have gone in there in a BU, business unit by business unit approach. Now with the new collaborative approach, we really take the whole force of ABB and we basically roll in city by city with an overall ABB effort. So, we're not out of the woods totally in China yet. But what the team has done is, they have stabilized the business on the grid side, we are growing quite strongly, and on the other activities we have found now a way really to address that market in a way that we don't have further deterioration.

So with that said, I hand over to Eric on your question on saving net.

Okay, Ben. So when we get to the saving, as you know, this is the combination of the price pressure and the cost savings that we have. We were quite pleased with the outcome in the quarter, and obviously our white-collar productivity program savings are really starting to yield good results. As is the ongoing program of 3% to 5% of cost of goods sold is also included in the calculation.

We are driving those programs very, very hard, and we should see, of course, a continued ramp up over the year. What exactly the net number would be quarter by quarter will then depend on the price pressure we have in those quarters. And we fear that we also focus on that side, but it's one that we have less control of.

So I will not give you an exact forecast on the run rate. But it should clearly be higher than what we have in the prior year, so we have more or less a small positive between those two items.

Thanks for that, Eric. Is there, just conceptually, is there any reason --

Ben. Sorry we're trying to keep it --

Sorry, I'll step back in line and come back, I am sure.

Next one please.

Andreas Willi, JPMorgan.

Good afternoon, everybody. I have a question on the US develop -- a similar question in terms of type that Ben asked on China. There the base orders have remained weak. What do you see there between industrial and power, and between underlying demand or continued de-stocking that could maybe still be going on?

Good afternoon, Andreas, and thanks for your question. Look, if you take the US, the biggest hit this quarter directly and our orders are down. And if you look at the [petal] behind it, that there are a couple of points. Let me start on the industry side.

We basically see a dual development in the industry in the US. Anything that's related to consumption, whether that's food and beverage, whether that's automotive, whether that's [received], is going quite okay including the residential part. Anything that's related to process is really, really weak.

And you see that a lot of capacity is being now considered on our customer side. There's a lot of capacity that will be reduced, especially on the new unconventional oil and gas exploration. We see that happening, and there's a very timid investment pattern that we realized so that won't hit us really strongly in the first quarter.

If you go over to the utility side, there are still some projects out there. But we see a certain delay in decision making on some larger projects that has hit us in that context. I would expect these to come back on the utility side, and we need to make sure that we continue working with our customers what we do.

If you look at the requirements in the North American grid, the US doesn't have the most modern grid of the world. They need to really invest to avoid having blackouts or having shutdowns, which will come. When we talk with utility customers, they make selective investments, for example, supporting the ramp up of renewables in the US. We see that coming in many places.

We also see now, for example in California, a take-up on e-mobility and charging stations require reinforced distribution grid. But a lot of these projects are in the pipeline at the moment, and the first quarter was particularly weak in the order uptick that we have seen there.

Thank you, and the second question to Eric on the earnings bridge. The volume column was negative, even though if I assume pricing is not very different than the last quarter, you should have had volume growth, if I look at your overall organic sales growth.

So why was the volume contribution in terms of profits a negative in an environment where you had positive volume growth? Because I would assume that if it's mix, it will be in the mix category and not in volume.

That's correct. The revenues were down by 2%, Andreas, on a comparable basis, and we do this on a comparable basis. So that is the key reason why the volume is down. So this is strictly related to where the revenue is growing, all the rest is in the mix side.

Thank you.

You are welcome.

Next question please.

James Stettler, Barclays.

Yes, good afternoon, all. I have a questions around power grid.

If we look at the base growth of 9%, very, very strong. Is there anything one off there? Can you talk a bit about them, bidding, pipeline, and indeed second part of the question also the pricing quality and how that will come out of the backlog and into the P&L? Thank you.

Thank you very much, James. If you take the power grid, I think we need to -- if you look back historically, we need to differentiate between three things.

First of all, our Power Products business and that building blocks of power grids has always been strong, and we really had a solid business there. The Power Systems challenges were always more related to our own challenges than they were to the market overall. And I think we need to really understand that when we go forward.

And thirdly, when you look at the way we are running the business now, we have already gone through a massive business model change and more disciplined approach to ordering intake and tendering on the previous Power Systems side. So that's just the opening statement on that one.

Now if I look at the market dynamics, ABB is truly strongly positioned in that field and I'll give you a couple of reasons. If you look at the supply side dynamics, renewables are coming in at a very, very high speed. I was in India one-and-a-half weeks ago, their first 700 megawatt plant on solar is now coming at $0.043 cents per kilowatt hour IPP price.

So I would expect to have a tremendous momentum coming into the grid from a renewable power generation side. That means the grids are undergoing a phase of demand changes and requirements which will require significant investments in two dimensions. The one is, we need to make sure that the renewable power generation sources, which are typically further away, get connected in a way with a very low loss power transmission at highest possible reliability.

And secondly, we also need to make sure given the volatility and unpredictability of renewable power sources, that we ramp up the automation and control capabilities in the grid. Because -- and that's not only true in India, if you go today to Bavaria and you have a plant plant of BMWs in Dingolfing, we need to make sure that the power quality when a cloud goes over Bavaria doesn't diminish when we have that going. So we need more control on the power quality to get that to our customers. Our customers realized it. There's more and more demand coming that way, and that's a great opportunity for us to differentiate ourselves.

And if you go on the demand side, the demand-side dynamics, I'll give you an example here. From Switzerland, more and more people are buying Tesla cars, more and more electric mobility is coming. There will be soon a car launched that will require a 150 kilowatt charger. In the past, the charger was 5 kilowatt, it was like five hairdryers at the same time and you switch them on, nothing happens to the grid. But then you switch 150 of them on at the same time to charge your car, then you have a significant increase of volatility and demand into the grid. And then you have 10 of them in line, you need to reinforce your distribution grid.

So I'm quite optimistic on the growth pattern of that activity going forward. Now what we need to do is, we need to make sure we make money out of this. So the way we run this business has fundamentally changed. We have cut down a lot of the EPC activities, we have become more rigorous on our risk management, the tender that we have won have filled our backlog with a completely different quality of, on the one hand profitability, on the other hand risk profile. So as you see now, the margin coming up on the power grid side, this goes pretty well in line with the turnarounds that we are seeing in the operational model, but also with the strong demand going forward.

So all together, this is an area that has significant growth in the market that can be realized. That's an area that [vies] through our transformation of the power grids business that we're going through, we are already seeing a significant result.

Look this business on a comparable basis more than 200 basis points worst last year, now we are 200 basis points up. And if we continue going down that path, I'm optimistic that we will have over time more margin accretion in this business well within the target boundaries that we have committed to.

Thanks, James. Next question please.

Mark Troman, Bank of America.

Yes, thank you. Good afternoon, Ulrich, Eric, and Alanna. I have a question on organic sales, the minus 2% that you reported in the quarter.

Your book-to-bill looks pretty good at 1.17 or 1.2 or so, and you had above 1 last year. Base orders flat, and I would imagine your backlog starts getting delivered a little bit more than perhaps it was this quarter.

So I guess the question is -- and your comparatives get a bit easier certainly next to, maybe not so much Q2. Should we just expect -- is this the worst sales growth figure we're likely to see this year? That's question number one, given those factors.

And question number two, I guess we had questions on China and the US. Maybe if I can switch it to Europe, because that looked to do pretty well, up 6%. If you could give a commentary on how you see Europe.

So I guess in the past, I guess structurally, you've been a bit less bullish in Europe versus the other regions. So is this reasonable growth rate that you see in Europe here to stay in your view? Thank you.

So, Mark, to your first question. I think your argumentation was very solid. And I would definitely say that we are fully committed to make this the worst sales growth quarter in the year, so we're committed to have the other ones better.

If you look at the fundamentals, we have built backlog, we have positive book-to-bill. We had positive book-to-bill last year, we have positive book-to-bill now in the first quarter. We have built backlog, and it's very clear that now all hands are on deck to drive execution.

We also have to very clearly say last year and the year before, we did a lot of internal homework. I kept the team really busy cleaning up the organization, making it simpler, and getting all that going. That work is either done or in good hands now, so we have people now driving the execution of our orders, of our revenue, being out with their customers and you see that momentum really kicking in in certain parts of the market. So the answer is yes, we aim very strongly to make this the worst sales growth quarter of the year.

And then second, when you ask about Europe. First of all, we are running Europe different than we did it before. You might remember, up to 2013 end of 2013, we had split Europe into three different regions and each region was running their own dynamic. It's now one cohesive region. Bernhard Jucker, whom you know from his very rigorous process in running Power Products is now running Europe, and he is really driving the PIE approach to a very, very good execution growth machine.

He's really crunching the growth out there, making sure that on the distribution side low-voltage and medium voltage and electrification works now better together. We're ramping up the momentum in customer in direction on power grids. There, we're having now one division instead of two. Customers don't need to think before they call ABB, do I have a system question or do I have a product question? They have a power grid question, and they have now one discussion partner.

If you look at the innovation pipeline that we have and the amount of innovations that we have brought into Europe, there is still some spending in Europe especially on differentiating technology that helps companies to drive either uptime speed or yield. It means also getting factor costs down. The robotics business is one example in that one.

On the process automation side, we have some offering. So altogether, and especially also in the traction business is doing well in Europe with our highly energy efficient technology that we bring out in the market. So overall, the picture is one where good execution with a better addressed market granularity will help us.

Let me run you a little bit through some of the countries, and share with you the pattern in the past and what we're seeing going forward. If you look at northern Europe, northern Europe altogether is quite well underway with one exception and the exception is Norway. Because in Norway, they got pretty hard hit by the decline in the oil and gas sector which is not a big surprise given what's going on around us.

But altogether, Sweden, Finland, Denmark, I would say we are pretty well underway. Even in Norway we have base orders slightly up this quarter, which is just showing that even in a tough market environment we can do well. In Germany, we had total orders clearly a hit because we had that large booking last year, but if we look at the base orders they are up 5%.

Italy is basically flattish on the base order side. And our Spanish and Turkish team are doing a great job, really being present with our customers. Not by coincidence, Spain was the first country that we rolled out salesforce.com as a sales support platform. I was recently down there in Spain spending time with the salespeople listening to them how it's going, and they are really highly energized. They really think we have invested very well, and they are beating now the market the strong momentum altogether.

If you look at the four divisions and their patterns, Europe altogether, Electrification products, you know we have a very strong platform in Europe. And Tarak his team are doing well. We had growth in Electrification Product in this quarter, and I would expect to have more growth in the future.

On the Discrete side, we had some contraction on the process related stuff. But on rail, on solar, and a couple of other activities we're doing quite okay.

Process Automation got hit, as I said before, by Norway. But we got significant new orders in Process Automation on the cruise segment. Because all of China is going on a cruise, a lot of Americans keep going on a cruise, and the demand for cruise ship is really very strong.

And as you know, there are some very large shipyards in Europe that are providing that. So altogether, I would say good execution in Europe and a focus targeted market approach will help us to continue to aim for profitable growth.

Thank you very much. Very interesting.

You are welcome Mark.

Next question please.

Simon Toennessen, Berenberg Bank.

Thanks, good afternoon, everyone. My first question is on the cash flow development and the improvements there.

You obviously talked about the working capital already. If I look at the swing on the operating cash flow, it seems most of it is driven by the turnaround of the Power related business compared to last year. But if I look at, for example, Discrete Automation, there's still a weakening both in absolute terms and also as a percentage of sales, if I were to do that ratio. Could you just talk a bit about what you are seeing there, and how that should develop over the coming quarters?

The second question is on the drivers of the EBIT, which you talked about net savings already, you talked a bit about volume. But it seems that particularly project margins mix and ForEx and the first two might be changing compared to what we've seen last year. So project margins being less positive and mix being more positive, at least if Q1 were to continue.

So I appreciate you're probably not going to give specific guidance, but if you could just help a bit more on these three factors within the EBIT bridge, how we should think about it in 2016 versus last year. Thanks very much.

Simon, thank you very much for your question. I think Eric is ideally positioned to address them.

Hello, Simon. On the capital side, you are perfectly right that Discrete Automation and Motion had less capital in the first quarter this year. But that is against a very, very strong performance last year, both in conversion rate run and absolute. So they are still doing well. They are taking money out of their working capital like the others.

So most of the capital improvements is actually coming also off the working capital improvements in the other divisions. And part of it's they are of course happy that we are not back in the positive and not in negative anymore, as we are washing out the old legacy projects and the negative impact that we had on those projects. So I would say, there is contribution from almost all the corners in terms of contribution to cash flow.

Then on your second question on the bridge. Scale of the project margins continues to improve. We see power grid step by step getting better. And as I think I've on the earlier calls, as we move through the backlog of power grid from the really most difficult projects to the more medium performing projects on the old backlog to the new ones that we have now, we should see a continuous improvement here.

The numbers might not be as high as we move forward on the quarters, because they require significant in the turnaround but it should still produce some positive impact. And on the ForEx, it is less than before and just simply has to do with the dollar.

As you all know, the dollar has even weakened against [all of us] in the end of quarter. So what we will have in the coming quarters will clearly depend on where the dollar is going for the rest of the year. But our base scenario is the dollar stays around where it is today is that this effect will weaken as we move forward quarter by quarter during this year.

Thank you -- .

On the mix, we were basically around zero now. The mix is obviously depending on how the backlog comes out, so it could be the positive it could be negative. And it depends also based on how the recovery on the base orders of the short cycle business is coming, because the more of such short book-to-bill business you have typically you're having a positive impact on the mix. So that's one which is difficult to make the exact forecast on.

Okay, thanks very much.

Thanks, Simon. Next question please.

Natalie Falkman, Carnegie.

Good afternoon. I will start with my first question, Kuka, which is your [P] in robotics. They were flagging for lower growth in robotics due to more stagnating automotive CapEx. Just a question how you see that, and do you think that the G growth in general interests will be able to push the overall robotics growth higher?

Thank you very much, Natalie. Thanks for your question.

I don't comment that much on my competitors, I'd rather comment on what we are seeing here. ABB has a different customer portfolio than Kuka. In our customer portfolio at the moment, we see solid growth on the Automotive side.

But even more so, as you might remember, very early, about five years ago, we embarked on a strategy that has basically two angles. The one is, we think we're going to have a stronger solution and application focus in robotics. And I think ABB is today the strongest because we have dedicated focused education vendors on certain activities that both serve automotive industry and non-automotive.

So you look, for example, at a car. Just selling a robot to a car company is today not differentiating enough, and you will not sell that much. What you need to do is, you need to create additional value.

So then you have, for example, at the medium of joining with other metals, you might need a roller [hemming] or gluing or riveting technology. And when you have the application fully figured out, you can go to the customer and not sell him a naked robot. You can sell them the value out of the joining technology that you can get, and that's clearly a differentiating element of ABB.

Secondly, we also have the strongest service attachment rate and we continue to do that. We have the best service network globally in robotics, because we have such a large entity that we can basically piggyback on the G&A cost side and we do service penetration all around the world.

And the third piece is really if you take the channel industry, we have a very, very strong growth momentum in many areas of the general industry. That is that we see industry whether it is new areas where we use the robots. And then you take the competitive advantage we have created by bringing out YuMi, which is the first truly collaborative two-armed robot that works outside of the cage that is easy to program, that also contributes.

So I would say, it's a combination of technology leadership. It's a combination of service reach, and a solution and application focus. And combined with the right mix between automotive and non-automotive that positions us also well for the future.

Thank you. And the second question was for Eric, Eric you mentioned already that you have savings coming from white-collar productivity program. Could you just help us understand how the benefits will come through this year of the $400 million gross savings?

As I said, we have the good ramp up in the first quarter on the savings. And as we have said also earlier on the call, we confirmed the $400 million gross savings for the full year and it should then ramp up over the year. And as we have also said in the earlier conversation, including capital markets, that we will be disappointed if not at least half of those savings make it to the bottom line.

And through the quarters, how do you see that coming through?

We will not make specific guidance exactly on the quarters, except that we have started well, we have a good ramp-up, and obviously it will ramp up as we drive the program upwards both this year and then into 2017.

Thank you.

Next question please.

Martin Wilkie, Citi.

Good afternoon, it's Martin from Citi. A couple of questions, the first one just on the base order growth. Even if we exclude power grids, the declines in the other business is probably not as bad as perhaps we'd feared given the macro data in Q4 into Q1.

Can you measure in any way whether you're taking market share? And I appreciate the markets you sell into are quite fragmented and complex, and it's not so simple perhaps to get quarterly shares. But do you think the collaborative efforts you are putting in place means that you are taking share, or do you think that efficiency investments generally have just been slightly better than some of the end markets? So that was the first question.

And then the second one is completely unrelated. You talked about an insurance provision release, I think in corporate costs you've previously guided, I think, for $400 million to $450 million of corporate for the year. Just to understand if there's any sort of change to that guidance. Thank you very much

Good afternoon, Martin, and thank you for your question. If you take the base on growth, I think you are right that we were probably doing okay given the massive deterioration of the end markets that we have seen. You might remember when I took office, I said very clearly that we want to create a organic order growth machine and the efforts that we have put in there over the last 2.5 years are really paying off.

First, I think we have a much better grip on detailed market segment understanding than before. We really know much better what's going on, and as you rightly say, the team much better for success to address the opportunities that are out there. We focus our investments in a better way. So across the portfolio in ABB, we sit down once a month, in what we call the growth board, that we prioritize capital allocation, that we prioritize activities, and that way we prioritize resources to really make sure we get the biggest bang for the buck in investments on the growth side which I think is a really good one.

Now on market share, you bet that our ambition is that we want to take market share. And the good news is with the better granularity that we have now in our understanding of the market, we can really track and monitor what the market share is. But more important, we also look what the market share drivers are.

So I'll give you an example. In the past, with the R&D money was basically allocated BU by BU, and each of the BUs came up with a certain list of money that they needed and projects. Today, we have a much more granular understanding, and we focus our R&D money in the decisive and differentiating elements that the customers really want, to make sure that if we do work on innovation it makes a difference to the customer in the relevant segments that we're aiming. And I think we are better -- we're not perfect yet, but I think we are grounded much better on that one.

And the second part of your question on the insurance piece, I will let Eric answer in detail. But you might remember we made a commitment to you that we will not hide. So when we have this kinds of gains, when we have this kind of bookings, we make them transparent that they become really understandable to you.

We did that very clearly this quarter, and that's something that you should expect also from us in terms of transparency and granularity going forward as soon as something is really relevant in that context. On the guidance for the year, Eric, I'll let you talk a little bit about that.

Martin, so on the guidance for the year on the corporate, we're not changing that number at this point in time. There is always positives and negatives that goes into this line, and obviously this affect we had now in Q1 is going to help us with that number. But at this point in time, we are not changing the guidance.

Okay, thank you very much.

Last question please.

Daniela Costa, Goldman Sachs.

Hello, good afternoon. Thanks for taking my questions. I have two quick things. The first one is, just wanted to follow up on the development of base orders.

If you could give us any color, how that developed through the quarter. Was there a trend of improvements? And if it's relevant to mention any difference by regions or businesses there.

And then the second thing is to follow up, I think over the prior quarter you have expressed the view that on oil and gas the services side was hit first, and then CapEx was supposed to be hit. But that maintenance couldn't be delayed for too long. And I was wondering, what have you seen in terms of what the customers are talking about regarding the services and maintenance side, especially now with the slightly higher oil price than maybe when we had the last conference call? Thank you.

Thank you very much, Daniela, and good afternoon to you. Let me give you a little bit of granularity on the base order side for the quarter. I think it's important that you understand the pattern here.

If I take it by region, if I take the Americas first, that's the most negative development, our base orders are basically down 10% for the Americas. And if you look at where we got hit most, I certainly -- we have in the US, in Canada, we have negative development there. And that's basically related very strongly to the contraction on the unconventional oil and gas production that they've [seen us] and the uncertainty on the investment activities on the utility side.

If you take Brazil, you might smile about it and don't believe it. But we have close to 40% growth in Brazil on base orders, because we won quite a bit of business, especially on our product businesses in there.

If I take the Asia, Middle East, Africa, we're up in base orders which is a great development. And I've said before on China, we're basically flat, a little bit negative minus 2%, but we were strong in Saudi and we were strong in Egypt. We were strong in Southeast Asia, and so altogether that was good.

South Korea and Japan was weak in the first quarter, so we didn't get what we wanted there in terms of growth. So altogether, a mixed picture in Asia, Middle East, Africa. And then if I go over to Europe, as I said before, we're basically flat a little bit positive, but flat. Sweden up, and Denmark up. So altogether, we have had a nice development there.

So if you look at the underlying pattern, why are we getting this base orders growth. I think we work together with our distribution Partners in a much better way than before. We've become more relevant by combining our business across medium voltage and low voltage activities, and we've stayed disciplined on pricing which I think is very important in that context as well.

Secondly, if you take the base order development on the Power side, we got fantastic innovations coming out. And that's something that really differentiates us from competitors. And in times like now, the uptime and reliability of the grid is so important that when the renewables kick in, people really focus strongly on the base activities there.

And if I just then pick a country that I'm particularly personally quite happy about, if you take the largest market in Europe, Germany, our base order business or our base orders across the range are up 5%. We had growth in Discrete, we had growth in Electrification. So altogether, that's a solid development.

We shouldn't be arrogant, never should be. But I think that the growth machine that we have put in place is really working, and the investments in technology allow us to differentiate in times where customers really look very hard if they spend what is the value that they get out of the product.

The second question was on the oil and gas side, what we are seeing there. Let me go through the different markets. First on service, we see that the service deterioration has significantly been slowed down, and is not having the downward momentum any more that we have seen last year. Whether that's really the bottom of the bathtub or not, I don't want to call that. But we're definitely seeing a significant slowdown of the negative development which should help us all together.

You have seen us announcing some orders in oil and gas still. And I think the differentiating capabilities that we have there, both on the control side but for example, bringing control together across power and the industrial process, the automation piece, and the industrial process is differentiating us and helps us all together. But oil and gas, I wouldn't call it a turnaround of the market momentum yet. It's still a very tough market out there. What we see, however, is investments on the downstream side, especially the non-integrated layers that only have their own downstream activities, they see now that projections on the oil price will remain pretty subdued and pretty low for the time being. So they dare to make now investments on the new calibrated expectations.

Also on some investments, Statoil was public about it and I can talk about. Statoil has basically recalibrated all their projects in their project pipeline to a lower oil price now, and now on the new oil price they have a revised priority of their project but it's coming. And we see some tender discussions picking up, but I wouldn't call it yet a turnaround in the market. So hopefully that gives you the clarity that you wanted.

Yes, the first one was actually regarding by month during the quarter.

Okay, we don't disclose monthly details.

Okay. Fair enough. Thanks.

Nice try.

Thank you, guys, and thank you for a great call, Ulrich and Eric, and look forward to Q2 results in July. And please remember that we have our Capital Markets Day October 4 here in Zurich, so we hope all of you can make it here. Wonderful, have a wonderful day. Thank you.

Thank you.

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