Abb Ltd (ABB) 2018 Q2 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2018 Results Conference Call. I'm Leonarda, Chorus Call operator. (Operator Instructions) 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. Jessica Mitchell, Head of Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to ABB's second quarter results briefing. The press release and analyst presentation were published this morning at 7 a.m. and can be found on our website.

This briefing is being webcast via our IR website as well as being recorded.

With me today are ABB's President and CEO, Ulrich Spiesshofer; ABB's Chief Financial Officer, Timo Ihamuotila; and President of ABB's Electrification Products division, Tarak Mehta, who will provide an update on ABB's integration of GE Industrial Solutions.

Before we begin, I'd like to draw your attention to the important information regarding safe harbor notices and our use of non-GAAP measures on Slide 2 of the ABB presentation.

This conference call will include forward-looking statements. These statements are based on the company's current expectations and certain assumptions that are, therefore, subject to certain risks and uncertainties.

I will now hand you over to Uli.

Thank you, Jess.

Good afternoon, ladies and gentlemen, and welcome to everyone who has joined us today. As usual, we will start with a review of ABB's results for the quarter. I will then provide a brief update on our 2018 agenda.

Let's look first at Slide 4, which gives an overview of how we have continued our profitable growth in the second quarter, driving both the top and the bottom line.

In the quarter, we increased order growth with all divisions and across all regions. The book-to-bill ratio increased to 1.07 at the end of the quarter and was higher than 1 in all of our divisions.

Our innovative digital solutions offering, ABB Ability, continued to be very well received by our customers, supporting growth with its portfolio of more than 210 digital solutions for utilities, industry and transport and infrastructure.

We completed the acquisition of GE Industrial Solutions within the committed time frame. We are pleased to welcome all our new colleagues from GE Industrial Solutions as part of the global ABB family.

With our disciplined approach to relentless execution, we have delivered both margin improvement and double-digit EPS growth this quarter and continue to drive net cost savings. In the second quarter, we continued to strengthen ABB through business-led collaboration. Notable developments included our global edge data center solution alliance with HPE and Rittal and the further strategic development of our brand with title sponsors of the ABB Formula-E championship. These results showed that our transformation over the past years is delivering. While we still have a lot of work to do, we are achieving clear progress in our focus on customers, in realizing value from growing our ABB Ability solutions portfolio and in driving relentless execution and productivity everywhere in our business.

Let's turn to the results in more detail.

As you can see from Slide 5, the second quarter saw continued order momentum. Total orders were up 8% with increases in all division and regions. Base orders, up 9%, also increased in all divisions and regions.

Revenues were up 1% at $8.9 billion.

Reported operational EBITA was up 12% year-on-year in nominal terms with the margin expanding 60 basis points to 13%.

The operational EPS result on a constant currency basis was 27% higher at USD 0.38 per share.

Cash flow from operating activities was $1.01 billion for second quarter 2018, and we are on track to deliver solid cash flow for the full year.

Slide 6 shows you our order development for the quarter in total and base orders in more detail.

Both total and base orders are up in all regions. Total orders were 8% higher. We have continued to see a selective recovery in large orders, which were up 2% year-on-year. Notable wins included large orders for fleet integration in transformers as well as automation solutions for specialty marine, oil and gas and chemicals. Base orders increased 9% on a comparable basis with strong demand in all regions.

In Europe, base orders rose 12%. Growth was broad based, particularly strong in Italy but also higher in Germany, the U.K., Norway, Spain and France.

The Americas experienced 7% base order growth. In the United States, ABB's base order were up 7%. Orders in Asia, Middle East, Africa rose 7%. And in China, they're up 23%. This was a quarter of strong performance in both the U.S. and China, ABB's 2 largest markets.

I will now hand over to Timo to take you through the results for the divisions.

Thank you, Uli, and good afternoon, everyone. Moving on to discuss the divisional performance and numbers in more detail.

Let's start with Power Grids on Slide 7. Total orders were up 5% while base orders rose 7%. The division has been delivering comparable base order growth for over a year now with broad-based growth driven by its Power Up initiatives. The book-to-bill ratio rose to 1.09 from 1.03 at the end of Q1. Revenues were 8% lower, reflecting the lower order backlog at the end of Q1. However, the year-on-year backlog situation improved from minus 7% at the end of first quarter to minus 4% at the end of the second. While the lower order backlog year-on-year will continue to weigh on revenues, we expect the continuing base order momentum to drive gradual improvement in comparable revenues for the remainder of the year.

The operational earnings margin was 40 basis points down year-on-year, mainly due to lower revenues and continued investment in the Power Up program. With gradually improving revenues and cost management initiatives, by Q4 we expect operating margins to improve and the division to be within its target margin corridor for the year as a whole.

Turning to Electrification Products on Slide 8. Total orders rose 6% while third-party base orders improved 4%. EP saw broad-based growth in product, including high single-digit growth in low-voltage and double-digit growth for data centers and EV charges. Orders were higher across all regions. Revenues were up 4% year-on-year, and the order backlog ended up for the quarter 5% compared to the same period last year. The division's operational EBITA rose 100 basis points year-on-year, reflecting continued operating leverage and pricing measures.

We closed the GEIS transaction smoothly within the planned time line. For the second half of 2018, we expect the impact from GEIS to increase sales in the EP division by roughly $1.35 billion. We expect GEIS to impact the division's operational EBITA margin negatively for the second half by approximately 260 basis points. The impact is expected to be higher than this in Q3 and lower than this in Q4.

Looking further out, we continue to expect the division to be back in its operational EBITA margin range of 15% to 19% during 2020, as originally committed.

Next, we have Industrial Automation on Slide 9. This was a quarter of excellent order growth for the division. Total reported orders in local currencies grew 30% year-on-year, reflecting the addition of B&R. Total comparable orders rose 15% with base orders up 9% year-on-year and double-digit growth in services. All regions advanced.

The division's demand growth was broad based, led by selective recovery in process industries, particularly oil and gas, and demand for specialty vessels. Year-on-year revenues were steady for the third consecutive quarter as strong performance from product orders continued to mitigate the order -- lower opening order backlog.

The division ended the quarter with its backlog 4% lower year-on-year, much improved from the minus 8% backlog year-on-year of the previous quarter. The operating margin year-on-year was up 70 basis points, reflecting continued positive mix, strong project execution and some onetime effects later in the quarter.

Now looking at Slide 10. We have Robotics and Motion, which had another strong quarter. Total orders grew 11% while base orders grew 16% compared to the same period last year.

The division captured growth in all regions and across all business units with drives and motors seeing continued support from recovery in process industries. Revenues experienced a similarly strong pattern of growth, increasing 8% on strong execution of the order backlog. The order backlog at quarter-end was up 6% year-on-year.

The division delivered a year-on-year increase of 100 basis points in operating margin, reflecting positive volumes and mix and tight focus on cost control and productivity.

To summarize the picture across the divisions, our focus on profitable growth and relentless execution is delivering. While the lower backlog position in IA and BG in particular has dampened revenues for the group, divisional performance in RM and in EP before GEIS is showing clear signs of improved operating leverage.

We'll look next at our group operational EBITA margin bridge on Slide 11.

In the second quarter, we continued to deliver net cost savings amounting to $94 million. This enables good mitigation of pricing pressures in the quarter through the ongoing focus on supply chain management, productivity and operational efficiency within our divisions and some ongoing benefit from the White Collar Productivity program that we completed in 2017. These were partly offset by negative impacts of $35 million from commodity price increases. Volumes and mix had a positive impact, contributing $19 million and $27 million, respectively.

Our investment in growth continued, including an increased investment of $56 million mainly in digital and sales. Inorganic activity, including the acquisition of B&R, and some impacts from the EPC's business model -- EPC business model change had a positive impact of $42 million. Currency translation had a positive impact of $34 million.

Including all of these impacts, the group achieved operational EBITA of $1,167,000,000, increasing 12% year-on-year, and a margin of 13%, up 60 basis points year-on-year.

Looking ahead, stronger sales, improved mix and continued cost savings are expected to provide ongoing support to margin development. The tailwind provided by currency translation in the first half is expected to turn into a headwind over the remainder of the year. As well, rising geopolitical uncertainties, such as tariffs, could act as a headwind.

Then specifically on GEIS, at group level, we expect an approximately 60 basis points negative impact on the second half 2018 operational EBITA margin. As we said going into 2018, our ambition remains to have full year comparable revenue growth and to deliver some margin accretion for the year as a whole, even net of the impact of GEIS.

On Slide 12, we have a summary of group items and an update to the guidance for these items.

Looking first at the items on the left side of this chart, the group's corporate operational EBITA was $278 million for the first half. As noted in Q1, we have seen higher negative impacts from noncore activities, which we expect to further impact the second half. We now expect full year corporate operational EBITA to be around $550 million compared to our original guidance for 2018 of $500 million. Our framework for the other items on the left side of the chart remains unchanged since the last time we spoke.

On the right side of the chart, we would like to focus your attention on charges to below-the-line items, including GEIS-related items for which we now have clearer line of sight. I will not cover every item in detail but would like to note that we expect normal restructuring costs to be around $200 million in the second half.

For the year as a whole, it's in line with the low end of the range originally expected with these costs now much more weighted to the second half. We expect $120 million of GEIS integration costs to be taken below the line in the second half, with $62 million already reflected in the first half. The rapid progress we have already made with the integration of GEIS has brought more of these costs forward into 2018. At the same time, over the 5-year integration period, a more efficient tax structure will reduce cash taxes by around $130 million. Overall, we expect the cumulative cash impact to be broadly similar to our original estimate. And Tarak will come back to this point in a moment. Approximately $25 million is expected to be booked for inventory adjustments at GEIS, and we estimate PPA-related amortization charges from GEIS to be around $25 million for the second half period.

And let me now hand back to Uli to update you on the progress on the broader group agenda.

Thank you, Timo.

Please turn to Slide 13. I would like to start with our focus on profitable growth.

Our streamlined and strengthened ABB today offers 2 clear value propositions to our customers: bringing electricity from any power plant to any plug and automating the industries from natural resources to finished products.

Within this, our 4 entrepreneurial divisions, each either #1 or #2 in their field, are driving growth through our high approach of penetration, innovation and expansion. Here are some examples.

In Power Grids, our Power Up program is driving margin penetration and expansion. A highlight this quarter is the $150 million agreement just announced with Ørsted, formerly known as DONG Energy, to connect the group's largest offshore wind farm to the U.K. power grid. ABB will be the supplier of grid integration, and ABB Ability automation solutions is part of a 5-year long framework agreement.

In Electrification Products, we are driving penetration of high-growth sectors such as data centers, EV fast charging and food and beverage. We have recently announced a global strategic alliance with HPE and Rittal for secure edge data center solutions. Our recent collaboration on a turnkey infrastructure software solution for the ULTRA energy-efficient Lefdal Mine data center in Norway shows the potential of this alliance.

As process industry shows signs of recovery, Industrial Automation will be working with China's Yitai Group in a series of projects to digitalize operation with ABB Ability in greenfield coal all the way to chemical plant.

And in Robotics and Motion, we are expanding our innovative robotics solution portfolio with the announcement of the acquisition of AB Rotech, an experienced supplier of robotics value solutions for the automotive sector in Turkey and Southeastern Europe.

Now let's go to Slide 14.

Our leading ABB Ability digital solutions portfolio is integral to driving growth in our divisions, and momentum is building in a very encouraging way. Put simply, it comprises software solutions for domain-specific value-added in utilities, industry and transport and infrastructure. Already today, our portfolio includes more than 210 of these digital solutions. This slide shows you how we are doing this with recent examples of development in each of our divisions.

ABB Ability's Distributed Energy Resource Management System, or DERMS as we call it, is enabling Power Grids customers who invest in renewables to better manage intermittent energy supply. The DERMS software and control solution provides real-time information so that network operators can control thousands of assets and optimize performance. This not only improves grid reliability, it also cuts the total cost of energy supply by up to 25%.

In Electrification Products, one of ABB's latest software solutions for low-voltage switchgear, ABB Ability MNS Digital, was installed in the Batisöke Çimento at the recently modernized cement factory in Turkey. With MNS Digital's intelligence, a facility can achieve operating cost savings of up to 30% and lock in an approximately 20% reduction in electrical infrastructure investments.

Moving on, at last month's Euro Mine Expo 2018 held in Sweden, we showcased ABB Ability MineOptimize, the new software and control solution set to help mining customers achieve enhanced productivity, efficiency and safety in their facilities. For example, it can reduce ventilation energy costs, a large part of any underground operating costs, by more than 50%. And with the new Condition Monitoring & Diagnostics in our ABB Ability Connected Services solution, they're using machine learning and artificial intelligence to better detect anomalies in robots. Through better predictive maintenance and optimization, this solution can achieve 24% reductions in downtime and 60% faster response time. These are just some of the many ways that ABB Ability today is adding value to our customers and strengthening the profile of our businesses, contributing to growth and driving profitability.

Please turn to Slide 15.

As the global market leader in EV fast charging infrastructure, we are proud to be a true pioneer in e-mobility, and I would like to spend a few minutes on this today. This is one of our most exciting market opportunities as adoption of electric vehicles is substantially increasing around the globe. By 2030, an estimated 24% of new cars sold globally will be electric. This is the equivalent of up to 25 million electric vehicles being sold each year and a total of 100 million electric vehicles on the road in total. EV charging infrastructure will grow exponentially with the number of charge points installed in a year expected to expand more than tenfold by 2030.

ABB is uniquely well placed in the value chain of e-mobility. There are 4 key building blocks for e-mobility: renewables integration, transmission and distribution grid upgrades, EV charging infrastructure and, finally, the electric vehicles themselves. ABB is the global #1 in 3 of these and working with OEMs of electric vehicles all around the world. We have made a promising start since launching as a start-up in the electric vehicle charging market back in 2011. As an example, in the second quarter, we launched our Terra HP charger, the world's first easy fast charger able to operate at powers up to 350 kilowatts. The Terra HP can recharge an EV's battery in about the same time needed to refuel a gas engine vehicle. It means about 8 minutes for a 200-kilometer range refill. We have recently received groundbreaking orders for this charger from Electrify America in the U.S. and IONITY in Europe. With ABB Ability, our fast-charging stations are connected via a cloud computing platform, enabling integrated vehicle and fleet data management and cashless payments as well as remote services.

In addition to our technological leadership, we have a broad installed base of more than 7,000 fast chargers in 60 countries today. Our reach as a group, we have a presence in over -- more than 100 countries, and more than 30,000 service employees worldwide uniquely positions us to achieve rapid growth and support customers all around the world.

Today, ABB's EV fast-charging business is already roughly $100 million in size. While it has been growing at a high double-digit pace, our end-to-end global electrification offering competitively positions us to benefit from the multiplier effect of increasing demand of electrification through e-mobility infrastructure. With our brand proposition reinforced through ABB Formula-E, we intend to capitalize on our leadership position in the future.

Turning to Slide 16, a chart many of you will be still familiar with, we illustrate our approach to ongoing active portfolio management.

As you can see from the chart, over the past few years, we have continuously shaped our portfolio towards better competitiveness, lower risk and higher growth. This was a very active period of transformation, but we would not say that our portfolio is now cast in stone. We will continue to shape ABB and constantly look for opportunities to shift our center of gravity to drive more profitable growth and further streamline and strengthen ABB. The guiding principles of our actions will always be what creates the most long-term value for all of our shareholders.

The purchase of GE Industrial Solutions illustrates this approach. With the acquisition, we increase ABB's exposure to the world's largest economy, the United States. Moreover, it strengthens the group's commercial profile in this very important market for Electrification Products division. And alongside other portfolio actions, it adds early-cycle exposure.

Now let me hand over to my colleague, Tarak Mehta, to update you on the specifics of this strategic acquisition. Tarak, over to you.

Thanks, Uli, and good afternoon, everyone. Please turn to Slide 17, where you can see the slide that we first showed you at the announcement outlining the rationale behind our acquisition of GE Industrial Solutions.

We are more convinced than ever by this proposition. GEIS expands our access to the attractive North American market and provides a significant installed base around the globe and particularly in the U.S.

This was run like a noncore business by GE, but as part of ABB, it strengthens our core and our #2 global position in electrification. It also offers a significant potential for value creation.

As key drivers of value potential, we see the injection of ABB's leading technology into a combined and harmonized portfolio, along with the delivery of the cost synergies. Together, GEIS and ABB will provide the most comprehensive electrification portfolio in this sector. Moreover, the agreement comes with a long-term strategic partnership that supplies GE with ABB's leading products and solutions.

Slide 18 provides an update on the significant progress we have already made while preparing for the integration of GEIS.

Since signing, we have completed a very extensive regulatory approvals process, closing the transaction, as committed, at the end June. We have created a new Electrification Products business unit named EPIS and appointed Stephanie Mains from GEIS as the unit's Managing Director. The leadership structure is in place, and we have focused on retaining key staff from GEIS as an important part of this process.

The clean team preparing for the integration has planned how to implement the transition from day 1. They have worked closely with GEIS to identify the resources required to secure the targeted synergies, and they have developed a comprehensive plan for infusing ABB's technology and ABB Ability solutions into the GEIS portfolio.

In the period between signing and closing, we looked closely at how to create the best of both worlds, and we have set clear performance targets in line with the acquisition business case. This extensive preparation has put our integration well on track. With EPIS and ABB already receiving first joint orders, we will continue to build on GEIS' deep customer relationships while bringing its performance up to peer levels.

Please turn to Slide 19, which revisits the significant value-creating potential of GEIS in financial terms.

We continue to see great potential to harmonize the joint portfolio, optimize our footprint and create cost synergies. These include supply chain synergies and SG&A efficiencies. With the current pace of integration, we expect to realize around $120 million in cost synergies in 2020, with the full $200 million run rate of synergies captured by 2022.

The profile is roughly 6 months ahead of our original expectations. The planned rapid pace of integration will front-load more of the costs into 2018 with $62 million of nonoperating costs already reflected in H1, as illustrated by Timo. We expect approximately $480 million in further pretax one-off costs from H2 of this year through 2022. Around 80% of these costs are expected to be nonoperational. Compared to our previous estimates, we also expect to realize around $130 million in reduced cash taxes over the same time frame.

In summary, I'm confident we will deliver the confirmed cost synergies and believe we will be back in our division's target margin corridor during 2020.

Looking further out, I'm also confident that we can achieve further top line synergies from the GEIS' significant installed base.

Thank you, and let me hand it back over to Uli.

Thank you, Tarak, and also thank you for your leadership so far on this important deal.

Slide 20 brings us on to relentless execution. With our 1,000-day program successfully completed last year, we are now driving towards world-class efficiency and effectiveness within our 4 divisions. We continue to deliver productivity improvements and cost savings through a systematic approach to supply chain management and the Lean Six Sigma methodology in all of our businesses. Let me illustrate this with some examples.

In Power Grids, our U.S. transformer factory ran a successful design-to-value program. We then did the program to factories in Sweden, where, in one of our high-voltage factories, this program reduced lead time by 67% and improved on-time delivery, cutting inventories by 49%.

In Electrification Products, we systematically raised standards with our Protection & Connection business unit across 12 sites to achieve a 50% improvement in quality performance and 22% increase in productivity.

Within Industrial Automation, a full site program in our Measurement & Analytics facility in Italy saw a 30% reduction in lead time and a tripling of the Net Promoter Score as a customer satisfaction measure.

And our Robotics and Motion division used the Lean Six Sigma methodology at one of our motors factories in the U.S. to increase delivery performance by 40% in a strongly recovering market.

In all, ABB has 1,500 continuous improvement projects within its 4 divisions underway. This supports our ongoing aim of offsetting 3% to 5% of the group's cost of sales each year and providing superior service for our customers. This ongoing focus on productivity has contributed to the improvement you are seeing in the operational EBITA of the group year-on-year despite steady revenue and ongoing investments in growth.

On Slide 21, you can see how we create value from strengthening our global brand. More than 1,000 trademarks have been consolidated into one ABB master brand, and we are enhancing our brand positioning with strategic investments such as the sponsorship of ABB Formula-E. This quarter, the champion races were held in Rome, Paris, Berlin and Zurich, bringing ABB to thousands of consumers and customers in important markets. With these measures, we have increased brand equity by more than $2.5 billion in the period as our new branding was unveiled. We have improved our reputation as digital leader that ABB is now ranked #2 versus peers, and we have made ourselves an employer of choice for graduates, doubling the number of job applications we received since the strategic brand launch in 2016.

Let me summarize on Slide 22.

All our markets are in growth mode. Rising geopolitical uncertainties will require careful navigation, but we are a global company with a strong and flexible global footprint and capable of meeting these challenges of our environment.

Longer term, the energy and Fourth Industrial Revolutions offer substantial opportunities for demand in ABB's 3 major customer sectors: utilities, industry and transport and infrastructure. ABB is well positioned to tap into these opportunities.

Concluding on the second quarter, we continue to deliver profitable growth. Orders were up in all divisions and regions. Our portfolio of ABB Ability solutions is driving growth. We have already made great strides with integration of GE Industrial Solutions. Operating margin have expanded, and we have delivered double-digit operational EPS growth. Our focus will remain firmly on relentless execution to deliver profitable growth in the quarters ahead as we write the future together. Thank you very much for your attention.

Now we'll open the line to your questions.

(Operator Instructions) The first question from the phone comes from the line of Ben Uglow from Morgan Stanley.

A couple quickly just, Ulrich, on China. Obviously, we can see a pretty nice sequential movement in the base orders. It was plus 12% last quarter, plus 23% this quarter. Is that -- can you give us an idea how much of that is actually a sequential improvement in demand and how much is just a comp effect? Are you seeing an underlying kind of trend increase in China in 2Q? And if so, which industries might be driving that? And then the second question, can you give us a little bit of help around tariffs? This has become a bit of a topic today on some of the conference calls. Is there any way of quantifying for us what percentage of your U.S. production is sourced from China, even a rough idea? I mean, I'd assume that this is fairly low, what, sub-10%. But can you -- could you give us any color on how your supply chain works from China into the U.S. for ABB?

Yes, Ben, thank you very much for your questions. Yes, your -- look, your observation on China is correct. We have a really nice China growth momentum, and I think the move of China as a country and the transformation of China as a country and the key issues and actions on transformation in ABB's portfolio fit really like a glove in these times. So there is a pickup on the overall momentum. Yes, the comparables were also a little bit easier, but all together, we see a pickup. And let me just run you through the 4 businesses, what we are seeing out there. If you take the Power Grids business there, they really are nicely up but, having said so, from a low comparable last year mainly due to really solid base orders and grid reinforcement on digital, ABB Ability and on renewables integration. In Electrification Products, basically China was good growth in the entire portfolio. We see also some sign of recovery in the industry. However, it's still mixed. On the one hand, food and beverage is up; oil and gas remains low in China for electrification. If you look at transportation, rail is good. If I look at buildings, there's really a dual growth. Functional buildings, such as hospitals and resource, are quite okay. Commercial building is a little bit slow, and residential really struggles from the governmental restrictions on the building market. In Industrial Automation, good growth. Here especially also, B&R is doing very well. We are super happy with the demand. And Robotics and Motion, both parts, both the robotics and the transport, is growing in a very solid way. Robotics, if you look at the amount of EV manufacturing that's coming out in China, we are very well positioned. So all together, I would say a good market and good priorities in China where ABB fits very well. And look, on the tariffs, let me just run you through a little bit. We have in the moment tariffs spread in the U.S. We have it in China. We have it in Europe. And we have a team that's basically looking at all of that to make sure that we are applying on-site the -- whatever is coming in, and some of the news are coming really on a daily basis. Secondly, we have our supply chain management clearly on top of all the topics. Now specifically regarding the U.S. In the U.S., we are pretty self-contained in terms of ready-made product. You might remember we even opened up a robotics plant not too long ago, so we can really do a lot self-contained. In the U.S., the topic is more raw materials. They have about 4,000 people on the shop floor that are producing motors and transformers. Now for our highly energy-efficient transformers and motors, we need specialty steel. And that specialty steel is not produced in sufficient quantity in the U.S. There's only one producer, and he's full bled out. So there is no capacity available. When you do that now -- when you source, we source from Japan and Korea. And therefore, this would be impacted if we don't get an exemption. It's very clear what our position is here. We want to have a level playing field. If a country says there will be tariffs on imports, we have to respect that. But our request is then at least that the raw materials and the ready-made product get the same tariff at the same time because otherwise, it would mean that jobs are moving away towards the country where the ready-made products come from. And we could also do that. We could ship into the U.S., but that would basically destroy the jobs that we have invested in, in the last couple of years. We have articulated that clearly to government. We have found open ears and a good communication, and we really hope that these uncertainties get mitigated over the next couple of quarters that we enjoy a pretty good underlying market in a positive way.

That's really helpful. I'm sure there's going to be a lot of follow-up, so I'll pass it on.

Thank you.

Thanks, Ben.

The next question comes from James Stettler from Barclays.

Two from my side. Can we just again talk a bit about Power Grids? I mean, having had the Power Up program now going on for some time, do you feel that you have the right setup here? Can you talk a bit about how you see the order pipeline evolving? And looking into next year, do we really think that you really think you can return to growth there? And a second question is on IA, which has continued to outperform at least my expectations on the margin. Can you talk about how you see the margin development for the second half of the year?

Yes. I'll start with the Power Grids situation. Look, in Power Grids, talking first [your observation] on the order momentum, I'm really happy. I'm really happy that Power Grids in the quarter has grown both in total orders, about 5%, and in base orders, 7%. That means also we are starting to build backlog again in this business. You might remember the backlog got dampened by a couple of different effects. The one was a softer market, especially on large orders. Secondly, the massive change in business model in EPC and also some divestiture of activities like the cable business that we had before that we got out. So basically, we're going through the backlog trough in Power Grids. We are building backlog with our good book-to-bill that we see now. And out of this, that will also help us to get out of the revenue contraction situation that we still have experienced in the second quarter. If we look at the transformation that's going on, we always said the Americas business was better, and then we make it bigger and better. The last couple of years was about making it better. We changed project execution. We changed the way we ran the portfolio. We divested a lot of activities. And we started investing into the future. Now that the growth is coming in, we really need to make sure we support the good growth momentum that's starting to build up. Digitalization of the grid, if you take the new smart transformer, the ABB Ability-enabled transformer that we launched in Hannover, honestly we were even positively surprised how well the market took that. So the momentum is building. Service opportunities, look, we have still a $400 billion resale value installed base out there, and Power Grids has the lowest penetration in service at about 12%, 13%. So we have a tremendous opportunity to do more in that one going forward. So with that elements together, we are confident that for the full year, we will have the business back in the margin corridor and that we are building growth momentum in the orders that will ultimately result in -- also in revenue growth and help then on -- with the [constitution] going forward.

For Industrial Automation, just the high level and then I hand over to Timo. Just one comment here on B&R. We are very happy with the B&R acquisition. It's growing continuously double digits. It's a result of the integration, and the financial results are ahead of plan. So it's good. And the collaboration of the B&R colleagues together with the other automation teams, be it on industrial automation or robotics, is really going well. So that's a good driver. The markets are coming back on the process industry. We see selective topics, plans and investments. So altogether, this is going the right direction. I'll let Timo now address the margin topic that you wanted to ask also for us, James.

Okay. James, we don't give the guidance directly, right, but I'll give some puts and takes. So we had a very strong Q2 in IA driven by positive mix, successful project execution and also cost savings. And we also had some slight onetime impact on the quarter. And now when we look at the business going forward, we don't expect all that to continue to repeat itself during the second half. And also, we are moving to stronger order growth momentum here. The backlog, as I've said, went from minus 8 to minus 4. And when we are starting to get new orders in -- especially larger orders, they basically will take the proportionate amount of services down a bit and can have a negative impact to the margin. Of course, this then pull through some other products, which then would be a positive for ABB overall. So that's pretty much where we are on higher margin.

Thanks, James.

The next question comes from Andre Kukhnin from Crédit Suisse.

Can I just firstly follow up on China and on robotics specifically? Yes, some participants from your supply chain and some of your peers have commented specifically about order cancellations there, and it sounds like primarily smartphones and maybe semi manufacturing related. But could we just confirm that -- whether you had any change in trends witnessed in China in robotics during Q2 and maybe splitting it between smartphone and industrial?

So when you take ABB's position in robotics in China, we are the market leader, and we are the market leader with a very specific business model but do it extremely well in the Chinese environment. We have a solution-based business model where we help our customers to have the functionality easily installed with robotics where some of our competitors are selling what they -- what we call naked product that a customer needs to build engining resources themselves. So that business model is super well suited to the specific situation in China. The second piece is we probably got the most localized team. Our business there is led by Chinese management together with an entire Chinese team there. They have very, very deep, long-term and forward-looking relationships with the customers, so we very often get involved very early in the process. Then customers think about how to design a factory and how to put in the solutions, which gives us a competitive advantage as well. We see solid demand on the automotive side, especially on electric vehicles. And there, I have to say that our position is a very strong one. We are seen as a trusted partner. Somehow, the ABB exposure to e-mobility in ABB [Spectron] helps there also to be an even more credible partner in that context. On the semiconductor side, on the smartphone side, some of the smartphone manufacturing is one that really robots can make a differentiating factor to productivity. Our solution offering again allows us to differentiate for one of the largest smartphone manufacturers in the world that has its base in China but also expands globally. They have recently within half a year gone from planning a robot-based assembly factory into installing a whole factory within half a year, develop 3 product types and 3 configured solutions. We were able to get a very significant factory up and running. So I think our competitive advantage positions us well to continue to have a solid growth in China, and maybe we experience this a little bit better than the one or the other competitor.

Thank you.

The next question from the phone comes from Guillermo Peigneux from UBS.

Guillermo Peigneux from UBS. Just maybe an additional question on aftermarket. We saw that the market organic growth has slowed down during the quarter, and I was wondering the drivers behind that slowdown. If you could give some granularity around that.

Yes, we have a -- yes, Timo here. Thanks for the question, Guillermo. So basically, on service orders, you're right, our service orders grew 2% during the quarter, but this is very isolated situation. So this is actually coming from Power Grids, where we had a quite unfavorable comp last year in high-voltage business. And when I look at the other 3 divisions, actually the service orders are growing very nicely and in line with or better than the other growth part. And also maybe just to highlight that our service revenues were actually up 13% during the quarter.

Thanks, Guillermo.

The next question comes from Mark Troman from Merrill Lynch.

Yes, just 2 questions, please. Firstly, on market share, Uli. I don't know if you think in any of the major areas, if you look at your base order data, say, this year or on a rolling 12 months, whether ABB has either gained or lost market share in any notable area. I wonder if you could highlight that, please. And secondly, on the profit bridge, we've seen net savings of, I think, $94 million. I wonder if you could comment on the pricing trends that you are seeing and where -- their impact. I know you mentioned it in Electrification Products division. Is that helping Robotics and Motion as well with things like the larger motors and drives? Or a little bit comment on the pricing trends, please? And also on the bridge, the other line was kind of the surprise. That was 0. Normally it isn't. Maybe if Timo could give a bit of an explanation what's going on there and how we should think about that going forward.

Yes, thank you for your question. I'll let the second one be answered by Timo. Let me talk about the market share. If you look at the base order momentum and the total order momentum, it shows very clearly that we are growing ahead of the markets in our businesses. And I think that's a very encouraging signal for us altogether. It also shows that our continuous investment in innovation, our strong focus on ABB Ability is really paying off, and it helps us to differentiate. If I become a little bit more specific here, I think the Power Grids business in the last couple of years we wanted it to become smaller because we said goodbye to certain activities. But now you see the strengths of this business coming back in a market that may be growing 2%, 3% rate of growth on total orders of 5% and base orders of 7%. In Electrification Products, a growth of 6% is really ahead of the market growth. Then you take the global reach that we have, that is good. Industrial Automation, I know that some people have come out with different messages about us. If you take the total order growth of 15% and base orders of 9%, it's very clear that we are taking share and that we are moving very forcefully. And especially, our Ability solutions in Industrial Automation go a long way. And if you look at the recent survey positioning us as the #2 in digital services, we are ahead of a lot of the competitors here. In Robotics and Motion, we have a total growth of 11% and a base order growth of 16%. This is really good. We are taking active share. So altogether, I think ABB is really firing on all cylinders, getting the growth momentum up. We are not anywhere yet where we want to be on the growth momentum, but it's improving. And coming out of the last couple of years, together with an improving market, this is a good situation. And you might remind just one thing. During the transformation, we increased our spending on R&D, we increased our spending on digital and still deliver a stronger margin. That means ABB really has a portfolio of highly competitive offering. And we are basically launching every month exciting, new capabilities and also drive sales in a much more structured way.

With that, I hand over to Timo to give you the insights of the profit bridge that you have asked from us.

Okay. So on the bridge first of all, when we look at the $94 million, so there are also some of the WCP savings on that line item. But then, when we look at how the savings from purchasing and operational efficiency are coming through, so they are coming through actually quite nicely. And then when we look at the pricing environment, so we still have a headwind from commodity, but we have been able to push that better into the market. And when we look at EP and RM in particular, so there is stronger growth dynamics in the market, particularly in the RM, and that also usually gives you a little bit more pricing opportunity on the market. So that's how that is developing in RM. We are also -- and you specifically asked about the larger motors. We are still having capacity, but less underabsorption than earlier. So that business is also moving to the right direction. Then if we talk about the other line being 0, so this is actually a pure coincidence. That does not mean that it could not come back later as being a driver here, and we just think they had some -- or less of these smaller items what are constituting that at this time like provisions and some other such items. So that's really the driver there. But as I said, it doesn't mean that it will be 0 from here forever. That's why we actually left it as a piece to the bridge.

Thanks, Mark.

The next question comes from Martin Wilkie from Citi.

It's Martin at Citi. Just a question on GEIS. So thank you for the update on the integration. In terms of -- there's a lot of market chatter that the business had deteriorated before you sort of got your keys and took over ownership. Just to confirm, is this starting point for profitability in line with what you expected? And just as a sort of -- as a follow or a part of that, when you talked about the guidance for the second half, it looks like you're giving a slightly bigger headwind to the divisional margin because of the GEIS deal. Is that just because of the phasing of above-the-line charges? Or is it because the underlying business is perhaps slightly less profitable to start with? [And what are you doing in installed?]

Martin, why don't we handle it the following way? I would ask Tarak to give you a little bit of a flavor on what he sees in the business and how he sees the integration ramping up, and then I would ask Timo to run you through the numbers on the situation. So Tarak, please give us an update on what you see in the business and how the integration has started.

Thank you, Uli. As we see it and we've spent some time with the team now, 2 or 3 things come out very clearly. The people of GEIS are very strong. Their relationships with customers are even stronger. But it's also very clear that we need to do homework in terms of the performance of the business. So we work together with the team of GEIS to put together a comprehensive plan that I described. In terms of the starting profitability question, we see it slightly lower than what we had thought through originally. But in terms of the overall scope and the opportunity, we still see -- we're still quite enthusiastic about the potential of the business. On specifics with respect to your question on profitability, I hand it over to Timo.

Yes, thanks. So basically, when I look at this now purely from the finance equation perspective, I would still call this that we are broadly on track regarding GEIS. So when you first look at the revenue line, it's on track, and we expect about $1.35 billion to come in second half, in line with our earlier expectation. We said in the beginning of the year 110 to 130 basis point impact for full year for EP, and we are now saying 260 basis points for second half for EP and a bit more than this during Q3 and a bit less during Q4. And it is fair to say that the running profitability is slightly lower in the beginning. But in the beginning, we also have some special items which we now know impacting like change in revenue recognition, for example. If you look at the implementation costs, we also have a bit higher implementation cost, but we have already taken part of that during first half '18. And we also have a clearly bigger positive cash tax impact than we estimated at inception, about $130 million. And as said, we confirmed the planned cost synergies now 6 months earlier. So that's where we are on the equation.

Thank you, Martin.

The next question comes from Simon Toennessen from Berenberg.

Firstly, on software, Uli. And you talked a lot about Ability solutions and how it's picking up, and appreciate that. And also, the partnership you have with Microsoft, you talked a lot in the past. I mean, over the last couple of quarters, you had in Q1, I guess, Emerson doing a partnership with Aspen. You had in just the recent quarter Rockwell partnering with PTC. And obviously, Schneider is ramping up with its deals. How do you see generally the likelihood and the need for ABB to do more partnerships in software beyond maybe with the partnership that you have with Microsoft there? And secondly, Timo, you talked a lot about the bridge already. But in terms of the investments in digital or generally the incremental investments, I think you started splitting it out as of Q3 '17 in the bridge. And so when in the next quarter, we're starting to comp, obviously, these incremental investments, how should we think about that -- the headwind in the second half? Is it going to be 0? Or is it going to be -- is it still going to be negative? And then lastly, Uli, you -- I thought, when I heard you on press calls this morning and also on the analyst call now, you've been a bit more pronounced when you talked about the portfolio not being cast in stone. And naturally, I had several incoming questions this morning with regard to Power Grids again, and I remember well your comments in 2016 when the strategic review was done why it remains part of the portfolio. But maybe you can just reconfirm on the call just the long-term commitment to Power Grids. That would be appreciated.

Yes, Simon, let me go through these questions one after the other. Let's talk about software first. When we talk about software, we need to remember that ABB's offering today is more than 55% already software based. So we have leadership in what we call embedded software. If you take our drives, our robot control, we are very, very strong. If you look at our entire portfolio, it's now moving in terms of software capability. We have now breakers that can control an entire micro grid through a software solution. So I think on the embedded software, ABB is very strongly positioned and well on the way. Then if you take the control software piece, they're really the combination of our historic strength as the #1 in distributed control software. This, the B&R offering, has closed the offering, and we have now both machinery and factory automation software control as well as the [factory] process industry. So I think in that second bucket, we are well positioned as well. The third bucket is application software. And in application software, you basically help to plan, to build and you operate better. If I start at the end of that, in asset health, in asset health in our industries, we are really leader in mining, we are leader in the power grid space. And we're expanding asset health very quickly into the robotic space. We have already expanded in the B&R space. So we are pretty well positioned there and get going. On the planning side, if you take recently one of our key projects, this -- and that's a project that I mentioned before. We helped a major mobile phone producer to set -- in half a year to set up an entire new factory. We simulated that new factory, which is a robot-driven factory, with our RobotStudio software and got that going. On the PLM side, we are partnering with others. So I think application software, that could be with one or the other acquisition coming in, but we don't -- we are not desperate to have it. And then the fourth bucket is software platform. If you take software platform, we have the partnership with Microsoft altogether globally on cloud, and that's going super well. It also helps us with cybersecurity because cybersecurity is today a clear differentiating factor. Combining our capabilities with Microsoft's, you see one or the other competitor now copying that model because it's very, very powerful. On AI, we partner, on the one hand, with IBM, but also with smaller players to really get that going and drive that. And the third part on platform is really the partnership with HPE and Rittal on the edge side where we are one of the few or basically the only large-scale industrial player that can provide edge solutions for cloud services through hardware and software to industrial customers and get going. So I think we have a good strength together -- altogether on the software path. And we have grown it very strongly. As you see, Ability is really off to a strong start. The customers love it. We have a very different approach than most of our competitors here because we go from a solution base, where we combine domain expertise but mostly software and application and engineering know-how, which really differentiates us and creates a lot of value to the customers.

Now let me hand over to Timo for the second question, and I come back later on with portfolio.

Yes, okay. So a quick one on the investments to grow. So as you see, we are at approximately the same level as where we were in Q1 sequentially. And of course, because these are mainly fixed cost type of investments, so you don't ramp them up or down that quickly. So we would expect that this will continue around these levels. I check your point that this was $49 million in Q3 last year. So compared to that, we would expect it to be a bit higher. But then if you look at the content of the number, we would expect that the digital will continue to grow, and the other items maybe go down a little.

And then taking your last question on Power Grids and portfolio, now look, we took the decision in 2016 to maintain the business. You might remember at that time a lot of people said this business might be worth $4 billion, $5 billion. If you look at the business today, we are on track for about $1 billion in profit in this business. We have turned it around. It's growing again. So I think it's much, much more today, and it proves to be a good decision that we have kept it in the portfolio. Now in the last couple of years, we were really, really active not only with Power Grids but also with other elements of our transformation. And we did a lot of things in terms of active portfolio management already, but we would not say that our portfolio is now cast in stone. We will continue to shape ABB, and we will continuously look for opportunities to shift the center of gravity of our company and really drive more profitable growth and continue to streamline and strengthen ABB. The guiding principle will be, as in 2016, always to what creates most value long-term for our shareholders, and that applies for the entire portfolio.

Thank you, Simon.

The next question comes from Andreas Willi from JPMorgan.

Uli, Timo, Tarak and Jess. I have a few follow-up questions on GEIS. You gave the revenue number for the second half of the year, which is very helpful for our models. Given that we don't know seasonality of this business also in terms of profitability first half, second half, maybe you could help us a little bit what kind of a full year run rate is for that business. And the second question on GEIS is on the split of the costs. So the integration costs are a bit higher, but you're also saying now that 80% are below the line versus 50% when you announced the deal. I would say back then, it was $200 million earmarked for investments into the product offering and similar things, which are kind of operating and are not restructuring charges. So what happened to that $200 million number given that you basically maintain the message on the 2020 margin for the division but now have lower costs above the line? So I just try to reconcile that. And the last question around that is the GE purchase commitment for products. It seems less clear from GE that there's a clear commitment here to buy from you. Can you maybe elaborate a little bit what exactly is that commitment from GE to purchase from you?

So thank you for your questions. I'll quickly address the purchase agreement and then I'll hand over to Timo on the financial. Now look, we agreed, as part of the value proposition, to acquire this business to a quite substantial purchase agreement between ABB and GE. GE historically has always been a very important customer for ABB across a wide range of our offerings, and we continue that pattern going forward. We are expanding it. In the context of the supply agreement, for competitive reasons, we are not disclosing all the details on that one, but it is something that naturally will be developed now going forward, and the teams are already having now the first meetings to really safeguard and make sure that we get rolling in that direction. With that said, I hand over to Timo for your other questions on the financial model on GEIS.

Yes. Thanks, Andreas. So first of all, on the top line seasonality there, it's not that huge seasonality here on the top line. So the overall is pretty close to this $2.7 billion. What we looked at announcement of the transaction, as I said, we expect approximately $1.35 billion for the second half. Then if you look at the overall costs, though, it's natural that at this point in time, after working through the clean teams and all that, we have a better visibility to the overall cost picture and also to the overall accounting big picture. And that has simply led to a treatment which we can now see better. I mean, at that point in time, we look that it could be approximately 50-50, but we will naturally continue on the plan to transition very fast to the ABB product offer. That's one of the key value drivers of the deal. So that one has really not changed.

Thank you, Andreas.

The next question comes from Daniela Costa from Goldman Sachs.

I have 3 questions. First, can you give us an idea? And what percentage of your facilities in terms of manufacturing serve more than one division? That's my first question. And the second one, related to that, so can you rank in terms of interlinks between your divisions? What are the strongest versus the weakest interlinks? And the third question is unrelated to this but relates to the automation side, so Industrial Automation. Can you guide us through which end markets have better margin profile within the division? That would be great.

Okay. Look, Daniela, thank you very much for your questions. And I might disappoint you on the answer to some of them because for competitive reasons, we are not disclosing all the details how we run our global supply chain and where we produce. What -- but in terms of which business supports what, if you take the Power Grids business, the Power Grids business is focused on providing all the activities that you -- and all the products and systems that you need to run the grid. Between the power plant and the substation, there is some demand in Power Grids coming from Electrification Products. It's relatively a small part. The rest of it is pretty independent. If you take Industrial Automation, Industrial Automation buys, on the one hand, from Tarak electrification solutions both for the industry space but also, for example, for the marine space. So that's a more significant relationship here. But also, Industrial Automation buys in a quite significant way motors and drives from the Robotics and Motion division and integrates them into overall solutions. So I would say the strongest purchase from the other divisions is Industrial Automation that we see today. It's clear that Electrification Products also buys some of the transformers that come out of the Power Grids division, so there is a relationship between these activities. Now on the margin profile, we are happy with the margin accretion that we are seeing at the moment, and our ambition is very clearly to have a good mix between highly profitable and more -- early development market. If you take our end markets, it's clear that markets that are more at the beginning of the S-curve like e-mobility, like the micro grid space, is not yet as profitable. I'm happy that e-mobility is at breakeven. So that's a good one. They go in the right direction. And then you have the different maturity. In general, our service business is a very attractive business, which is the greatest in all of the divisions through the percentage of activity. But other than that, we are not disclosing any further details on that.

Thank you, Daniela. And with that, we'll bring our call to a close today. Thank you very much to everybody for joining us today.

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