Abb Ltd (ABB) 2017 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome to the ABB Second Quarter 2017 Results Conference Call. I am Maria, the Chorus Call operator. (Operator Instructions) And the conference is being recorded (Operator Instructions) The conference must not be recorded for publication or broadcast.

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

Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome to ABB's Second Quarter 2017 Results Briefing. We have with us today ABB's President and CEO, Ulrich Spiesshofer; and ABB's Chief Financial Officer, Timo Ihamuotila. Uli and Timo will discuss the Q2 results and update us on the execution of our Next Level strategy and the 2017 outlook. After they speak, they will remain on the line and we will open the call for your questions.

The press release and presentation were published this morning at 6:45 in the morning Central European Time and can be found on our website. This briefing is being webcast via our Investor Relations website and is being recorded.

Before we begin, I would like to draw your attention to Slide 2, which provides notice that this call will contain forward-looking statements and make use of non-GAAP measures. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.

With that, I will now hand over to Uli.

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

If you move to Slide 3 of the presentation, let me summarize some of the key figures for the quarter. Our growth momentum is building. We delivered higher orders across all the regions. Overall orders improved 3% compared to the second quarter 2016. Robotics and Motion was a strong contributor with 14% order growth. I am very pleased to share with you today that as of today, we have sold more robots than in the full year of 2016, including many smaller version robots for the so-called light industries.

Industrial Automation also turned in a solid performance with orders up 8%. Base orders improved 3% and increased in 3 of our 4 divisions. Electrification Products was negatively impacted by having fewer business days and trading days in the quarter. Large orders increased 5% and represented 8% of orders, unchanged compared with the same quarter a year ago.

We delivered 1% revenue growth on the basis of a good book-to-bill ratio. We reported an operational EBITA margin of 12.4%, which was dampened by commodity prices and some overcapacity. This margin was not in line with our expectations. We are taking swift action to reverse the situation in the second half of 2017.

Operational earnings per share reflect the impact of lower total operational EBITA and higher tax rate for the quarter. We are still committed to our medium-term double-digit growth target, and we are taking the necessary steps to achieve it. Cash flow from operating activities primarily reflects the timing of our short-term employee incentive payments.

Now let's turn to Slide 4 and consider our performance in the context of our 3 focus areas: profitable growth, relentless execution and business-led collaboration. As I stated earlier, orders were up 3% and were higher in all regions. Service and software orders grew 8% as our service and software growth initiatives are paying off. We are pleased that our industry-leading digital officer -- offering, ABB Ability, has already contributed to growth, and our artificial intelligence partnership with IBM is being positively received by our customers.

Our offering has been further strengthened by the successful completion of our acquisition of B&R, a global leader in machine and factory automation. Moreover, in the third quarter, we expect to complete the recently announced acquisition of KEYMILE group's mission-critical network communication business. These acquisitions demonstrate our targeted and disciplined M&A approach.

Our operational EBITA margin was 12.4%, and all divisions were in their target margin corridor. Our Industrial Automation and Power Grid divisions turned in solid performance in the quarter. Our Electrification Products and Robotics and Motion divisions, despite some sequential improvement, could not compensate for the impacts of commodity price increases and some overcapacity in selected businesses. Part of the issue was that we were not fast enough in securing product price increases in certain businesses, but we have since addressed this and are not expecting similar impacts in Q3 and Q4.

Our White Collar Productivity program remains on track to deliver increased run-rate savings of $1.3 billion by the end of 2017. Net working capital as a percentage of revenues decreased 90 basis points to 14.1%. This shows that our new cash culture is delivering results.

We continue to improve country and account collaboration, helping us to build further growth momentum especially in smaller countries. In 2016, we set up global and regional service centers to provide our businesses with high-quality back-office services in finance, human resources, information technology and supply chain management. The ramp-up of our global business service centers in Kraków and Bangalore is well on track. We now have 2,500 employees providing high-quality business services and are right in the middle of lifting and shifting the work that was previously done in some other countries.

During the first half of 2017, we announced executive committee changes that even better reflect ABB's geographic balance. On April 1, Timo became our Chief Financial Officer and a member of the group executive committee, joining us from Nokia. Effective July 1, Chunyuan Gu, our Managing Director of ABB in China, became President of our Asia, Middle East & Africa region as well as a member of the executive committee. Chunyuan takes over from Frank Duggan who was appointed President of Europe region succeeding Bernhard Jucker who retired after distinguished career at ABB. As you can see from our 3 focus areas, ABB is truly continuing its transformation.

Please turn to Slide 5 to give you some granularity and share with you the performance in terms of regional order development. We are seeing broad-based growth across all 3 regions. In the Americas, orders grew 2%, driven by demand for energy-efficient solutions in industry, buildings and transport as well as by increased investment in automation.

Total orders in the United States grew by 7% overall, bolstered by orders for robotics and traction solutions. Construction and onshore oil and gas also contributed to this growth. Canada's order development was soft in the quarter primarily due to lower demand from industry and construction. Brazil experienced growth from grid investments and construction, but we need to point out that this growth compares to a very low 2016 order base.

Growth in Europe was strong at 6%, benefiting from growth-based positive market developments in industry, transport and infrastructure. We saw double-digit total growth -- order growth in the U.K., Sweden, Finland as well as in Spain and Turkey. This growth primarily came from robotics, traction solutions, cruise ships and construction.

Base orders grew 1% for the region with Sweden, Spain and Turkey as the main positive contributors.

In Asia, Middle East & Africa, total orders grew 2% with base orders up 9% for the quarter. India's order growth was up 11% and more than 20% in the base orders and was broad-based. China had lower large orders than a year ago but delivered strong base order development. Again, robotics solutions continued to be a growth driver in China. Other positive contributors in the quarter were South Africa, Saudi Arabia and other parts of the Middle East.

With that, I would like now to hand over to Timo.

Thank you, Uli. Let's turn to Slide 6, where I will take you through some of the Q2 divisional highlights.

Electrification Products was impacted in Q2 from fewer business days in 2017 compared to 2016. If we compare the first half year of 2016 versus 2017 by adjusting for the difference in business days, then orders were up 1% and revenues were up 2%. Operational EBITA margins improved sequentially from Q1 '17, reaching the low end of our target margin corridor of 15%. However, the margins were lower for the quarter versus a year ago mainly due to higher material costs, which more than offset productivity and cost savings. We have notified our customers of related price increases and expect commodity headwinds to have less of an impact in Q3 and Q4. The solar inverter business also continued to have a dampening effect on the division's margins.

Orders in Robotics and Motion were 14% higher as growth was seen in all regions and all business units. Third-party base orders contributed with an 8% increase that was mainly driven by strong demand in robotics, traction and light industry. Operational EBITA margins were impacted by product mix, higher commodity prices and under absorption, which more than offset our cost reduction measures. We will continue to implement operational improvements as well as take additional capacity out where needed.

In Industrial Automation, total orders grew by 8% due to selective CapEx investments in oil and gas, mining and cruise ships. Third-party base orders continued to be positive. While investment in process industries, especially offshore oil and gas, remain subdued, selective investments in mining, exploration and downstream oil and gas are expected to continue. Revenues for the quarter were 7% lower, reflecting the execution of a lower order backlog. Operational EBITA margins increased slightly as cost and productivity savings offset the lower revenue.

In Power Grids, third-party base orders returned to growth and grew 2% on investments in emerging markets. The tendering pipeline is good but the timing of large contract awards is in some cases taking longer than expected. Operational EBITA margin increased 50 basis points to 9.8%, reflecting improved productivity, project execution and continued cost savings. And please remember the Power Up investment program when updating your models.

As you know, we are now reporting the results from the divested Cables business in corporate to ensure that the Power Grids figures are clear. There is an update to the initial restatement, and the updated files can be found on the website. Regarding capacity restructuring costs overall, we have not incurred much in the year-to-date. This figure is expected to increase significantly for the second half of 2017, and our guidance remains at $200 million to $250 million.

Let's move on to our operational EBITA margin bridge on Slide 7. In Q2 '17, we continued to deliver on our cost savings programs. We achieved approximately $121 million in net savings. This came from our ongoing cost savings program, pricing pressures and our White Collar Productivity program. Commodity prices had $28 million negative impact on operational EBITA as the cost for many of our raw materials continued to increase. We are showing this item separately for the quarter since the impact was more significant than in previous quarters.

Net volumes were negative for the quarter as a result of lower operational revenues and additional investments in growth. Project margins were slightly higher versus a year ago. The mix was unfavorable primarily due to lower-margin products and solutions from Robotics and Motion that were delivered in the quarter. As discussed earlier, other includes a number of items like salary inflation, under absorption, changes in corporate provisions and other small one-offs. Altogether, the group achieved operational EBITA of $1,042,000,000 and a margin of 12.4%.

Let's then move to Slide 8. As a percentage of revenue, net working capital continued to decline year-on-year. However, we need to remain aware that we still have a lot of work to do to meet the target of $2 billion by year-end. We have put a series of clear actions in place and remain committed to deliver.

The cash flow from operating activities for the first half of 2017 was not as good as we expected. Compared to the first half of 2016, we had approximately $90 million less in operational cash flow from our Cables business, which was divested. We also paid more tax, both direct and indirect, than in the same period a year ago. One expected item was the delay in customer payments from Saudi Arabia, which impacted cash by approximately $140 million. For full year 2017, we expect cash flow from operating activities to be somewhat above last year's levels.

Let me now hand the call back to you, Uli.

Thank you very much, Timo. So let's turn to Slide #9. We launched Stage 3 of our Next Level strategy at the Capital Markets Day in October 4 last year. It is designed to unlock further value through 4 key activities: driving growth in our 4 market-leading entrepreneurial divisions; the quantum leap in digital activities through ABB Ability; accelerating the momentum in operational excellence; and strengthening the global brand.

Let's turn to Slide 10. Back in September 2014, when I laid out the Next Level strategy, we made it very clear that it is our ambition to shift ABB center of gravity towards strengthened competitiveness, higher growth and lower risk. We are continuing this transformation. Since the beginning of 2017, we have made great progress. From a portfolio management standpoint, we've undertaken a number of actions while remaining disciplined in the way we go after this approach.

We completed the acquisition of B&R, a leader in machine and factory automation, a true growth and innovation leader, and we acquired NUB3D, a specialist in 3D visual inspection software and solutions for robotics. We have also announced the acquisition of KEYMILE's communication network business to strengthen our leading position in the digital grid, which should close in Q3. Besides acquiring these businesses, we divested those that are not longer core like the high-voltage Cables business in the first quarter of this year. Beyond these actions, we announced the partnership with IBM on artificial intelligence and executed successfully the launch of ABB Ability, our leading digital offering, among many others. This is a truly transformative period for ABB.

Please turn to Slide 11. We are very pleased that our leading digital offering, ABB Ability, which was launched at events in the United States, Europe and most recently in China in the first half of this year, is off to a very good start. ABB Ability reinforces our leading position in the fourth industrial revolution. By integrating all our digital solutions and services into one group-wide global offering and continuously expanding it, we can drive value for every one of our customers.

With more than 180 industry-specific digital solutions and services, ABB is unlocking tremendous value creation and growth opportunities in all of our customer segments. We invested already in 8 ABB Ability collaborative operation centers around the world, 2 in the U.S., 4 in Europe and 1 in Asia and more is to come soon. We are partnering with IBM in digital technologies to bring the best in artificial intelligence analytics to our customers and with Microsoft in cloud and collaboration in certain verticals.

Let's continue on Slide 12. Our Power Grids division is a true innovation leader and has made many investments in digital technologies in the past year. So today, we are clearly leading in the digital grid. ABB Ability is providing solutions for state-of-the-art grid reliability, improved asset effectiveness and powerful charging stations, just to mention some. Customers are very excited about the capabilities of ABB Ability and the advantages it is providing to them.

To give you some examples, just last week, we announced a $30 million order in Sweden and Denmark for our HVDC line using our ABB Ability MACH technology to drive grid control, reliability and effectiveness. Another notable order includes the ABB Ability intelligent power distribution solution for a new production line in Semiconductor Manufacturing International Corporation that allows unique win in reliability. And the win of our EV fast-charging infrastructure for U.K.'s first electric bus system in Harrogate in Northern England. Solutions such as these are supporting the competitiveness of our 4 entrepreneurial divisions and of our customers all around the world.

Please turn to Slide 13. As you can see from this graph, we are continuing the journey and truly transforming Power Grids for sustainable value creation. Since 2014, we have more than doubled the division's operational EBITA margin, reflecting improved productivity and continued cost savings. We are fundamentally changing the division's business model and limiting risks across its entire business portfolio. This is being done by investing in businesses that increase our mix of services and software while, at the same time, divesting parts that do not remain core to ABB and changing the business model.

We are very pleased that we have handed over our last offshore wind contract, DolWin2, and are steadily flushing out our old legacy projects from the past. Additionally, the Power Grids team is leading a range of activities, including productivity, cost savings and operational improvements while staying focused on achieving excellence and project execution. For example, the acquisition of the mission-critical communication networks business of KEYMILE will help us to enhance our capabilities and strengths as the leader in digital grid. Power Grids continues to be the partner of choice for national, state, institutions and utilities worldwide as they build or upgrade their infrastructure.

Now let's turn to Slide 14. The graph on the left shows how ABB has continued its regular cost savings program, leveraging operational excellence and world-class supply chain management to achieve savings equivalent to 3% to 5% of cost of sales each year. We will continue to drive cost out and remain on target.

The graph on the right shows how our White Collar Productivity savings program has outperformed the expectations since its launch in 2015. It is well on track to achieve its increased cost reduction target of $1.3 billion in run-rate savings while incurring lower restructuring and implementation costs than were initially announced.

So let's conclude with Slide 15. ABB has continued to build growth momentum, and our targeted initiatives are delivering results. Total and base orders grew 3% compared with the second quarter 2016 with higher orders in all regions. Revenues were up 1%. The operational EBITA margin was 12.4%, dampened by commodity price headwinds and some overcapacity so more homework to do.

Net income was $525 million, while cash flow from operating activities reflect the timing of short-term incentive payments. Net working capital as a percentage of revenues was 14.1%, a reduction of 90 basis points on an annual basis. We have the right actions in place to deliver on the goals of our working capital program by the end of 2017.

Looking ahead, the short-term picture is mixed. Uncertainty still hangs over global markets, but growth in China is expected to continue and indicators are still positive for the U.S. 2017 can be best characterized as a transition year for the world and for ABB, but long-term growth drivers remain in place for utilities, industry, transport and infrastructure. We firmly believe the long-term outlook is still positive. Thank you very much.

Thank you, Uli and Timo. Before we open up the line for questions, I would like to remind everyone on the call that we are having an Innovation and Technology Day on September 6 at the heart of our North American robotics operation, just north of Detroit. This event will showcase ABB's leading capabilities in Industrial Automation for process industries, ranging from robotics and the recent B&R acquisition to our #1 position in control, software and systems. We will also share the latest successes of ABB Ability and our digital offering.

Please, if you have any questions, you can reach out to us. There's also registration on our website.

With that, let's open up the line now for your questions, please.

(Operator Instructions) The first question comes from Andreas Willi, JPMorgan.

My first question is on pricing and how you manage pricing across the group. How do you connect basically the central planning and purchasing side of the business that sees these headwinds in pricing, building with Salesforce and maybe why this delay in reaction has happened and what you are changing structurally to how you manage price in the company?

And maybe also in terms of the earnings bridge, where was the commodity impact shown in the past when it wasn't that material in terms of negatives or positives?

Okay. Andreas, thank you very much for your question. When you look on pricing, there's different mechanics in place. First of all, in many areas of the business, for example, in Power Grids, we have an automatic price clause in our key long-term contracts so when commodity prices go up, the prices of the goods get automatically adjusted. And you see that in the result of the quarter in Power Grids. Power Grids didn't get impacted on the raw material prices that strongly.

Now if you look at EP and RM, there is no possibility to have the same quality of contracts in there because a lot of that is distribution business that runs slightly different. So there, as you rightly say, it's absolutely crucial that the connection between the raw material price increases and the pricing decisions on the front end is swift and executed in a good way. Investment in Salesforce.com helps us to automate that further, and in the future, we will have even better connectivity between the front and the back end. It's very clear that in the second quarter this year, we did not meet our expectation in swift pricing actions, and this will be a topic that we are taking now on as a team as we automate these processes going forward to avoid the glitch that we have seen in the second quarter. Now on the commodity question, I'll let Timo answer that one.

Yes, Andreas. On the earnings bridge, commodities was earlier in other. But because it was more meaningful driver this quarter, we decided that it's better to show it separately.

My follow-up question, on Qatar, you won some substantial orders there over the last 12 months. Maybe you could shed some light on the execution of these contracts given the current situation and whether there's any risks here for ABB.

So look, Andreas, as in every country in the world, when there is uncertainty in the political environment, we make sure that we stay close with our customers. We work with them very closely to ensure execution is going in a swift way. At the moment, we have no reason to doubt that this will go ahead going forward, and naturally we are monitoring the situation in a responsible way.

Thank you, Andreas. (Operator Instructions)

The next question comes from James Moore, Redburn.

I'll take 2 then. Firstly, on the margin, if I could. For the full year, I know you've said that 2017 is a transition year, but can we do the 40 bps to 60 bps this year? I think your first half was down about 30 bps, so you'd need 100 up in the second half. That's my first question.

And secondly, on EP, can you please quantify the basis point impact in the quarter from the price versus raw material issue? Are we talking 20 bps or 60 bps? We're just trying to get a handle of what's not there in the second half.

Okay. So James, on the second question, we can't because we're not disclosing that level of detail. But both had an impact which was material in the second quarter, and we are now taking forceful action to make sure that EP is tracking in the right direction after that miss in the second quarter.

On the margin on the full year, yes, look, we announced very clearly that on the long-term basis, our ambition to -- is to raise or have accretion of 40 to 60 basis points. We are firmly committed to live towards that ambition. We are also firmly committed that the second half of the year, we will live this ambition and get as much towards this ambition as possible.

Yes. Maybe Uli, if you're okay, I could add some drivers for the second half, not guidance but drivers. So if you look at this, first of all, from FX perspective, so if we would assume that the FX would stay the same, then we would have less headwind from FX. The same goes for commodity because we would expect the pricing strategies to start to kick in on the market. On tailwind, we would also expect slightly better mix. And then on the other hand, we would expect the Power Up cost to go into BG and be a slight headwind.

Then further on the action side, so we took fairly little restructuring during the first half, $58 million altogether. Our target, $200 million to $250 million, remains so we are expecting to execute more restructuring in the second half. And we are also taking discretionary cost measures now in such a way that it does not harm the long-term growth prospect of the company.

Thanks, Timo.

Next question comes from Ben Uglow, Morgan Stanley.

A couple of questions then. So first of all, just on Robotics and Motion, it's quite difficult to understand exactly what's going on there because, effectively, you got 3 large different businesses, so robotics, motors and drives. What I wanted to know is can you give us any color or any kind of sense of how those different margins are performing? And is it the case -- I mean, my assumption would be that it's the motors business which has gone down or is very low, so that's -- is that correct? And could we have some color there?

Second question just on price increases. Obviously, they take time to come through, but we see this at Schneider and others. Is it reasonable to expect for Robotics and Motion that you do see the positive effect of price increases coming through as early as the third quarter? And will the second half margin -- should that second half margin for that one division be significantly better?

So this was very simple 2 questions. Thank you very much, Ben. Let me work them through. If you take the Robotics and Motion division, your observation is right, there are basically 3 building blocks. But between these building blocks, there's additional dynamics that I'm happy to share with you a little bit more granularity. Let us start with Robotics. Robotics is growing significantly, double digit, not starting with a 1. So this business is really taking off in a great way, and it's developing very, very favorably in a market which is very attractive. And our formula of running this business in a completely different business model than previously is really successful. Robotics had in the second quarter a great run on orders. Robotics headed into the second quarter also with some bulk shipments of large quantities of robots, which dampened the Robotics margin slightly. That's a one-off thing in the second quarter, but it is something that we had in there.

Now if I move on to the drives business. The low-voltage drives and medium-voltage drives go -- undergo a different pattern. The medium-voltage drives are tied to the process industries, to large CapEx projects, and that's an area where we have had a dampening on the top line. And actually also, we need to ensure that this business adjusts its cost base in the appropriate way as fast as possible to get going. And as you rightly say, on the motor side, there is the key issue in Robotics and Motion. There's one element, that's the commodity prices. If you look at motor, it's a lot of copper and iron in there. The last 12 months, copper and iron have both raised more than 20%, so that's something that's really hitting us. And we need to make sure that we realize that commodity price increase through pricing actions as much as we can, as fast as we can. And I think there, the team in the second quarter could have acted even faster, and we are speeding that now up, right, in the third and fourth quarter. So I'm confident that in the second half of the year, we will work towards mitigating that effect. The second element in motors and generators is the capacity utilization. And there's a really interesting balance between, on the one hand, taking out costs and capacity; and on the other hand, having enough capacity available, especially on the engineering side also, when the larger motors pick up again, which are very often engineered to customer purpose, to have enough muscle there to participate in the upswing of the market. Honestly, in the second quarter, that formula got a little bit out of sync, and we are putting it now back in sync to make sure that it's going the right direction. So there is a glitch in RM and EP in the second quarter, and we are mitigating it in the way as I just described.

Now on the pricing -- on the price activity, I think I answered that mostly. I have -- with Andreas before. I gave you the price mechanism, and that's something that we are acting quite forcefully on to ensure we safeguard the margin there as well.

Thank you.

Next question comes from James Stettler from Barclays.

Yes. Just a quick follow-on on pricing. I mean, when you raise prices, is it -- are these generally sticking? Were there any risks in certain areas that they don't more so than others, question 1?

Question 2, again coming back to Power Grids, so the backlog there is down 2%. We talk a lot about the tendering activity. What's really holding back? When do you see an inflection point? What's -- what really needs to happen for these orders to come in?

Thanks for the question. Yes, look, on the pricing, as you rightly say, making price increases stick is very important, and there you have different dynamics. If you look at pricing towards distributors, the day we pay our distributors, they get a commission on realized price so there is an incentive to help us to push these price increases through in the market. So you can assume that on the distribution side, it's highly likely that we can push it through. On the OEM side, on the end customer side, it's always a tough one, especially in segments where the market dynamics and the market demand is subdued, so this is more difficult. And the more you go towards process industries, the more difficult it is at the moment because this is something that is a segment that's suffering from low activity and low demand. On the Power Grids side, it's 2 elements -- or 3 elements. On the one hand, there's a market out there where you have volatility in the award of large projects. That's nothing new. We always have had it. The second point is we have a change in business model. We are consciously -- and that's the reason -- one of the reasons why we are calling 2017 a transition year that is not fully comparable to 2016, we are changing the business model. In many areas, we are not taking the EPC content anymore. We are not taking installation content anymore. We do more system integration and solution business. And that means that has a dampening effect on the top line in the way we take certain projects on and the role that we play and participate in certain projects. And the third point is selectivity. We want to make sure that in the future, we are not repeating the mistake from the past just to push the top line like crazy. We want to have a good quality underlying business. So these are the 3 drivers. If I look at the underlying market dynamics at the moment, I don't see any reason to be concerned. Medium, long term, this will be developing in the right way. In short term, the business model change, the selectivity and the market patchiness have contributed to where we are now.

Thank you, Uli.

Next question comes from Guillermo Peigneux, UBS.

Just wanted to follow up a little bit on the commodity inflation. I understand that at the moment the net pricing picture isn't clear. But kind of seeing that the P&L impact from the commodity inflation is there, so if you could give us more clarity about the decrease in magnitude of the pressures you're facing from the raw material inflation.

Guillermo, thank you very much for your question. I think we have said in the topic all we wanted to say. There is dynamic out there. You see steel, copper, silver, lead all underlying a certain dynamic. In steel, it depends in which region and what type your -- you buy it. We're monitoring that very closely. We have a special commodity buying and commodity team for exchange traded commodities that are working that through. It is important that we fly on site and have swift actions on the pricing and costing side. We are taking them now more forcefully in the third quarter and influence the team that everywhere, not only in IA and PG, we have good result, how we mitigate these topics.

Next question comes from Martin Wilkie from Citi.

It's Martin from Citi. A couple of questions. The first one, you mentioned in the past, and you alluded to a few moments ago, that you wouldn't want to cut into muscle in some of the longer-cycle markets. And so just to clarify, when we think of the overcapacity this quarter, some of the swift actions you mentioned for the second half, have you changed your view as to when some of these markets might recover or the level that they may recover to? Or is this more sort of a temporary phasing issue in the quarter?

And the second question then, which is on cash. You mentioned payments in the Middle East. Just to understand, was that a small number of contracts? Was it broader based? And what gives you confidence that, that doesn't become an issue again in the second half?

Yes, Martin. And thank you for your question. On the muscle, our approach remains unchanged. We will not cut into the deep muscle of our engineering capabilities and the core differentiation opportunity that we have. So this is something that will not change. When you look at the outlook of certain activities, take the U.S., I think in January, February, the world was -- including ABB, was quite excited about opportunities in the U.S. That has calmed down a little bit. If you look what's happening in Europe at the moment, we still have the elections in front of us, so we need to be careful there. And it's very clear that the expectation in certain spending patterns and parts of the growth has been a little bit delayed and subdued, and we need to manage that, and that's the key cause that we missed a little bit on the second quarter and that we are fixing now going forward. So there's no change in the basic sentiment. There's just a glitch in the second quarter that we didn't meet the expectations, and we are fixing that now, as we speak. With that, I hand over to Timo on the Middle East question.

Okay. Thanks, Martin. So when we look at cash overall, we have a couple of drivers here, and as I mentioned, this Saudi $140 million is a big driver. We also have some tax, and we, of course, have a little bit lower results. So those were the main drivers. And as I said earlier, for the full year we expect to be somewhat ahead for full year '17 compared to full year '16. Then when it comes to these receivables, we are not seeing that these are bad quality receivables, i.e. there is no problem with the quality of the receivables, and thus, we really expect that this is a timing issue only.

Thank you, Timo.

Next question comes from Simon Toennessen from Berenberg.

Two questions. The first one is just generally on your portfolio. Looking at the book-to-bill, let's say, over the last 6-or-so quarters. You've been below 1 on a group level more or less, taking Q1 out. I know you're monitoring, surely, performance against how you're doing versus the market you're operating in. Can you just, maybe Uli, give us a sense sort of how you're seeing your performance right now against the market, let's say, in areas like low-voltage motion drive, medium high-voltage process? I'm sure in Robotics the answer is pretty simple, but just in the other areas.

And secondly, just on Industrial Automation, I mean, the oil price is down another 15%, I think, year-to-date. And I know you're not going to guide into next year obviously yet, but I think consensus is looking for high single-digit growth there for next year on EBITA in this business, taking B&R out. And the book-to-bill remains below 1 there. What do you think can surprise on the upside there over the coming, let's say, couple of quarters?

Yes. Simon, thank you for your question. If I run through the portfolio and the portfolio dynamics and go through the 4 divisions, let's start with the Power Grids. I think I answered already partly before the top line dynamics that we see there. We are more selective. We have changed the business model. And the underlying market is patchy but it's a solid market. So for me, '18 will be the first year where we compare against a similar '17 in terms of the underlying business models the way we run this business, and I expect that we get growth going. It's very clear that we stayed away from certain type of projects. It's very clear that we have been selective on projects that we just didn't want to have. We want to make sure that we serve our customer well with good solutions and we make decent money at a digestible risk profile in this business. If you take Industrial Automation, I think Peter and his team are doing a remarkable job increasing the margin in an environment that the backlog is down. The backlog is down about 7% quarter-on-quarter compared to the last year's quarter, and despite that, they're doing a good job. So Peter runs a really nice forward-looking business model where he takes cost and capacity and adjusts it in a good way. Now the good news is, if you look at the growth pattern in this quarter, our Industrial Automation business is up in total orders 8%; and in base order 3 -- third-party base orders, 2%. So if I look at that together, great dynamics that the team has delivered. And if I go through where we are in Asia, Middle East, Africa, in this business, the base orders is slightly up. So we were able to still get some good businesses in the Far East and Africa. We have a good activity in India. So altogether, this is going in the right direction there. But going forward, and I'd tie it to your second question on oil price, I think there is service activities picking up that we can do. There is some early cycle OpEx picking up. And I can tell you, especially in that segment, the resonance on the customer side from ABB Ability is phenomenal. So we are really, really happy there. The customers -- the most used word of customers in that segment on Ability is "finally". "Finally, ABB you have a comprehensive offering. We really love it." So I'm optimistic that this will help us converting to growth in the next year and go in the right direction despite the markets not being so strong.

In Electrification Products, we have a very strong exposure to the utility side in Electrification Products, and that's a little bit subdued. So we had an issue there in the medium-voltage side that we need to work on. On the industrial side, I'm quite optimistic going forward that we're going to get the growth going again.

That leads me to Robotics and Motion. In Robotics, look, we are #2 in robotics now. We have the firm ambition to become # 1. If I look at top line pattern and the bottom line contribution, we are tracking very well towards that target in the right direction. The market is good. And we are constantly becoming market maker with new solutions in segments that haven't used robotics before, which is going in a very good way, and I'm quite happy about that one. On the motion side, the mode is grid oriented, consumer goods-oriented. Lighter drives and motors have a good dynamic. The larger ones, I described before. So altogether, we are now, for the third quarter, in a base order positive territory. We have the actions in place to continue the growth momentum. And it's our firm ambition in an uncertain world still to deliver growth going forward in the remaining of this year and next year.

Thank you, Uli.

Next question comes from Jeffrey Sprague from Vertical Research Partners.

Just 2 questions, if I may. First, on B&R, obviously, you didn't own it in the quarter. But I'm wondering if you could give us a little color on the growth trajectory in the quarter. But if not, perhaps more importantly, as you look into the back half, anything we should be aware of in terms of getting this model correctly and just the trajectory on the top line there?

And the second question is just on U.S. T&D specifically. We have seen a number of utilities starting to talk about a higher spend rate, but we're really not seeing it come through yet in anyone's results. And just wondering if you could give us a little specific color on what you're seeing in the U.S. on the utility side.

Yes. Thank you very much, Jeffrey, for bringing up B&R. You make me a happy man talking about it. This is a great acquisition that really plugs the big gap that we had in machine and factory automation. The business is doing tremendously well. We are really happy with the development that it had. We are not publishing the detailed numbers of the business. But since the signing of the deal a couple of months ago, the business has developed fully in line with our expectations. We are very happy with the growth momentum. The teams are working extremely well together. The culture fits like a glove. Our announcement on July 6 that we are building an additional new R&D center in the headquarter, also that we are expanding the activities in emerging markets, that we are driving joint country growth plans and get going there, I think I'm optimistic that we will keep the growth trajectory in this business going forward. So there is no reason to change any assumptions at the moment. We are fully on track, and the activities are coming in rightly. Timo, you want to make some remarks on that one from the CFO perspective?

Yes. If I can make a comment regarding it because there was a question on the modeling, so maybe to shed some light there. I mean, of course, we have not yet worked through the full balance sheet consolidation, as you know, because this was a subsequent event on the quarter. But just for modeling purposes, on the PPA amortization, it should be something like $70 million for second half, and this includes the step up from the inventory. And this $70 million is probably split pretty evenly between Q3 and Q4. And then for the full year '18 on PPA, we would expect about $80 million. And then when you look at the profitability, so on the acquisition case, we said that this business is about 12% EBIT. And as there is no PPA inside the business at the moment and then when it comes over to ABB as we measure operational EBITA, when you take the PPA out, it should be around the same level as a starting point. So just wanted to give this.

So I hope that helps you with your modeling now. Thank you, Timo, for that. Now in the U.S. T&D situation, yes, if you take out Power Grids business in North America, the total markets -- the total orders for us are up in this market. We got a couple of larger ones. We've got a large order in the Power Grids grid integration business, where we are delivering [stat com] solution that helps us get more capacity and then stabilize an existing [gate]. The total orders in the U.S. and Mexico are up. So that's going in the right direction. And I was in the U.S. now, I think, 9 times already this year, meeting very often with customers and sitting down. It's clear that the infrastructure in the U.S. needs investment, and there are a couple of drivers for it. Number one, the average age of a large power transformer in the U.S. is more than 35 years. The lifetime expectancy usually is about 30. So there is an upgrade need on that one. Secondly, the reshoring of industrial activity into the U.S. will require investments in the grid. Thirdly, if you look at the ramp-up of unconventional oil and gas in the U.S., which will be a big spending entity in the years to come, they also need reliable power supply. So altogether, there are good and solid drivers there medium and long term to get it going. I don't want to speculate then not as being [cut] -- and clarity comes in how the infrastructure programs will come in. The signal that we are getting is there will be significant spending. We just have to be patient and close to our customers that, in the moment, this is coming and the tot is -- the knot is untied. We can roll into this in a good way. Our footprint in the U.S. positions us clearly as the #1 in Power Grids in the U.S. We are leading there. We are continuing investments, and it's also nice to see how ABB Ability helps customers in the utility sector. There's a planning of a grid that becomes more volatile, there's renewables and more demand-side dynamics, and how we are helping this asset health to address the challenge of an aging grid. So altogether, I'm cautiously optimistic. The timing is a question. The overall dynamics will be intact.

Thank you.

Next question comes from Gael de-Bray from Deutsche Bank.

So my first question is on Power Grids where the book-to-bill has been below 1x for the past 5 quarters now. So I guess, given the lead times in this business, it seems increasingly likely now that sales growth could actually turn negative in the next few quarters for Power Grids. So do you think that you perhaps need to be a bit less selective, a bit less shy in taking orders going forward and that you will need to reinvest in the sales force at a much faster pace than what you've been doing so far? That's question #1.

And question #2 is, well, again, about pricing trends. I think I remember that in Q1 you said that pricing was getting a bit better than a year ago, in particular in the low-voltage area, with price rises of around 1%. So given the 80 bps margin decrease in electrification, does that mean that you actually need more than the 1% price rise to offset the commodity cost?

Yes. Thank you for your 2 questions, Gael. If I take the Power Grids situation in the market, as I just laid out, the underlying drivers are intact, and this will not change the selectivity pattern because we want to build good quality backlog going forward. The sales force and front-end improvements is one of the elements and one of the growth drivers within our Power Up program. So if I describe it very simple, the last couple of years were about making Power Grids a better business and even compromising top line to make it a better quality business. The next couple of years will be about making this business better and bigger, but bigger in the new pattern of the business model, in the new offering, a much stronger digital effort, a much stronger services effort that we are driving going forward. So there's no reason to shy away from that direction. As the Robotics turnaround that has gone through a similar pattern successfully demonstrate, if you have patience and perseverance and the right kind of long-term perspective, a massive business model change might pay off at the very end, and that's what we are aiming for in Power Grids as well.

Thank you.

Now on the pricing trend, look, in the second quarter, it was very clear that the pricing measures that we had taken did not -- they're not sufficient to realize the margin impact -- or to neutralize the margin impact from the commodity price increases. We are driving now forceful actions, both in the cost and the price side, to ensure Q3 and Q4 are in good shape. We are not disclosing then what exactly it means in terms of the pricing, whether it's 1% or 1.5%. We will take sufficient actions to compensate that. I would expect that we are trending towards 2% altogether to realize the opportunity to compensate the margin.

The last question comes from Jonathan Mounsey from Exane.

Just a couple of quick ones, please. The savings programs, White Collar program and also the working capital initiatives, I guess we're getting nearer the end of these programs than the beginning. I just wonder, have you given any thoughts to what might come next, sort of into 2019 and beyond? And just on -- I guess it relates to both the M&A you've done, so B&R and KEYMILE, which strike me as being sort of linked to the Ability program, filling out the offer. I just wonder whether, as you develop Ability, there'll be need to do other M&A to kind of create this cohesive end-to-end connected offering.

Jonathan, thank you very much for your questions. Yes, when we started Next Level, we said, in the first couple of years, we will have group-wide programs where we ensure we get the hygiene and the cost base of ABB in good order. That's why we launched the working capital program, this is why we launched the White Collar program as programs that go across the entire group. I'm very happy with the progress on the White Collar Productivity program. We will achieve the $1.3 billion cost out that we have committed, and we will achieve that with less restructuring. So by the end of this year, the program will be finished. But that does not mean that there are no further opportunities in White Collar going forward. But in the future, we will run these programs through the divisions, the functions and the regions so each of my leaders will have specific targets for his or her share of the White Collar community to drive further productivity going forward. So Timo, as the CFO, will have a target, as of 1st of January 2018, how to drive finance productivity. Jean-Christophe will have it on HR, the functional leaders of R&D and other areas will still continue that, but we will not run it as a program anymore. It will be the responsibility of each of the leaders.

As far as the question on working capital, hand over that to Timo in a moment. I will just briefly address first the B&R acquisition question. If you look at B&R and KEYMILE, they were 2 very important acquisitions, B&R to get us into machine and factory automation and fill the historic gap. And it was just a perfect fit where we don't need to do restructuring, where we just continue the growth story and invest to get this going. KEYMILE, connectivity and communications in the grid is an absolutely crucial element. Doing that with the right cybersecurity solutions and with the right software capabilities to drive it in a safe and reliable way in the future digital grid is really paramount, and KEYMILE is adding to our capabilities there and, again, fills a gap that we had in the portfolio. It's a [legal box] in the offering that fills both in Ability and individual grid capabilities. And you will see us doing more bolt-ons in the future. If you look at NUB3D on the vision solution and vision software side and robotics, if you look at others, that's the continuous bolt-on activities that we continuously enhance our solution capabilities going forward. But then I hand over to Timo to make some comments on the working capital program.

Yes. Thanks, Uli. So similar situation regarding working capital on the landing of the program. So when we look at where we target to get after -- getting the $2 billion out, we should be in a good place against external benchmarks. And then these programs, first of all, on receivables will become part of the global quote to cash process. And we will, of course, continue to drive it hard. Same is regarding payables, so it will become a part of the procure to pay process. And again, there, we can do even more work through harmonization of payment terms in general. And then finally, in the inventory, I also think we have further opportunity after the 1,000-day program lands, but that we have to look at with longer term. But we have clear landing plans and action plans in place for landing the program.

Thank you very much, Uli, Timo. Thank you, everyone, on the call. Just a reminder again, our Innovation and Technology Day, September 6, a great opportunity to see all of our technology in action.

Have a wonderful day and a wonderful summer. Talk to you later.

Thank you very much to all.

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